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Salary sacrifice axe blow to 600,000 company car drivers

bmw i3 salsac
Salary sacrifice to go: except for ultra low emission vehicles like BMW i3

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23 November 2016

2016 Autumn Statement: Key points

  • Tax savings on salary sacrifice and benefits in kind to be stopped from April 2017, with exceptions for ultra-low emission cars (see below), pensions, childcare and cycling – but existing arrangements protected until 2021
  • New definition for ultra low emission cars to be announced on December 5
  • Insurance premium tax to rise from 10% to 12% next June
  • New company car tax rates for ULEVs from April 2020, set at 2% for zero emission, and – reflecting new VED bands – ranging from 2%-14% for CO2 emissions between 1g/km and 50g/km depending on zero-emission range.
  • From 2020 company car tax rates increase by 1% to the maximum 37% for cars with CO2 emissions of 90g/km and over.
  • Fuel duty frozen at 57.95p per litre of fuel sold.
  • 100%  first year capital allowance on installation of EV charging points

THE death knell for salary sacrifice cars affecting 600,000 drivers was sounded in Chancellor Philip Hammond’s Autumn Statement.

It was softened with exemption for low emission vehicles – countered with the revelation that a new definition for ‘ultra low emissions’ won’t be announced until December 5, precisely four months before the new tax year when the salary sacrifice axe falls.

Salary sacrifice schemes allow employees to give up part of their salary to gain a non-cash benefit – such as a lower emission and safer new car – which means overall pay is lower, so employees pay less tax and national insurance. Hammond called it “unfair”.

There was some cheer with billions to be invested in transport and digital infrastructure, £390m to be invested into low emission vehicles, freeing up money for more EV chargers and “building our competitive advantage in low emission vehicles and development of connected, autonomous vehicles”.

What the Chancellor didn’t say was how he would pay for it – but that was in the files of his predecessor George Osborne’s announcement of the new VED rates applying from 1 April 2017 with the Treasury predicting billions of pounds extra income – see panel below, left.

Hammond made no mention of the new road fund licence, for which both the AA and the BVRLA had pleaded for the introduction to be put on hold.

But what has been clear from the industry response is anger at the way warnings have been ignored that changing salary sacrifice would hit demand for new cars and impact on the drive for lower emissions.

LeasePlan UK’s managing director, Matt Dyer said: “The Chancellor’s decision to target cars gained through salary sacrifice is both destructive and disappointing for the motoring industry.

“We must also remember that going forward, HMRC have been clear that they will make no distinction between salary sacrifice and the practice of offering a cash allowance in lieu of a company car meaning this could affect up to 600,000 drivers.

“The vehicle rental and leasing industry contributes £24.9 billion a year to the UK economy, and company car leasing schemes are a large part of that success story – with over half of new car sales alone last year going into fleets.

“We should also stress that these drivers are the hard working essential car users such as tradesmen and nurses, most of whom will be the JAMs [people Just About Managing] that the government is so keen to provide for.

“Whilst we should take some solace from the fact that Ultra Low Emission Vehicles will remain unaffected and any existing arrangements will be protected until 2021, this is complicated by the fact that a new definition has been given for ‘Ultra Low’ and we will have to wait for the Finance Bill on 5 December to see exactly what this means.

Paying for it: New VED rates to bring in billions

Under the new VED or road fund licence bandings taking effect from next 1 April 2017, the Treasury has predicted the following levels of additional income:

  • 2016-17 – £250m
  • 2017-18 – £195m
  • 2018-19 – £670m
  • 2019-20 – £940m
  • 2020-2021 – £1,425m

“It is also astonishing that April 2017 has remained as the implementation date, giving providers and employers comparatively no time at all to ensure they can comply with the new rules effectively, leading to unwelcome complexity for very little gain.”

On salary sacrifice, arrangements in place before April 2017 will be protected until April 2018 with more expensive agreements for cars, accommodation and school fees protected for longer – until April 2021, the Treasury said.

Automotive industry expert Professor Colin Tourick said: “There will be a general sense of shock in the industry that the chancellor has changed the arrangements for taxing salary sacrifice schemes.

“You can see why he has done it: he expects to raise more than £230m pa once the new system has bedded in in 2018-19.

“However, all is by no means lost for the fleet industry and for those employees who have salary sacrifice cars or planned to have them. People already sacrificing salary will continue to enjoy the benefits for four years.

The arguments for salary sacrifice

How the case was made to HMRC

“We can expect a huge rush in salsac registrations between now and 5 April, when the new rules come into force. And employees can continue to enjoy the benefits of salsac if they choose an ultra-low emission car, which is no great hardship as there is now a good selection of sub-75g/km cars on the market, with more to come soon.

“All in all, whilst this is not the outcome the industry was hoping for it’s by no means a disaster.”

In a broader presentation the Chancellor confirmed a new £1.3 billion package of road investment. and £390m to be invested into low emission vehicles, freeing up money for more EV chargers and “building our competitive advantage in low emission vehicles and development of connected, autonomous vehicles”.

He also announced £1bn invested into digital architecture, with the aim of making the UK a leader in 5G connectivity that should help development of connected cars as part of increased investment in science and technology innovation. That should help the country’s automotive and engineering industries.

On the insurance front, it was announced that Insurance Premium Tax will rise again next June, from 10% to 12% adding £40 to a £1,000 premium, while payouts on whiplash claims will be curbed – with a predicted premium saving of £40. But fuel duty will be frozen again.

Infrastructure: roads and digital

  • £1.1 billion for local transport networks in England, with a further £220m to address local traffic pinch points.
  • £1bn invested in digital architecture, to make UK a leader in 5G connectivity – will help development of connected cars

LeasePlan’s Matt Dyer welcomed the freeze in fuel duty. He said: “Now in its seventh year the freeze on fuel duty is a welcome boost to UK households and businesses saving an average of £130 per driver.

“Not only will this help UK motorists, it will also be a continued reprieve to those who work in logistics, with light commercial vehicles expected to save an estimated £350 per year.”

On infrastructure he said: “By pledging this kind of investment, the Government is securing the provision for a better connected and more dynamic infrastructure that suits both the needs of people and businesses.

“The vehicle rental and leasing industry contributes £24.9 billion a year to the UK economy and in 2015 the leasing industry accounted for half the number of new cars registered on the road. So this news will be especially pleasing for businesses, whose roads have suffered from poor organisation, congestion and pitted surfaces for decades.

“These roads are vital for the businesses that will power the country through years of lower-than-expected growth, so it is reassuring that the UK Government now views this as a priority.”

Jonathan Turner, strategic development manager at Hitachi Capital Motor Finance, welcomed the boost for green motoring: “We are delighted that the Chancellor has announced £390m future funding for low emission vehicles and electric vehicle incentives, including a new 100% first year allowance for electric vehicle charging infrastructure.

“The Government’s grant scheme has so far been instrumental in encouraging increased purchase of electric vehicles, which not only reap benefits for the buyer who can save on petrol money, Vehicle Excise Duty and congestion charges, but are also hugely advantageous for the environment and crucial in reducing the emission of harmful gases.”

Reviewing the overall picture, Rupert Pontin, Glass’s director of valuations, repeated his predictions of challenging times ahead.
He said: “The Chancellor has underlined how tricky the next few months and years are likely to be because of the economic turbulence created by the BREXIT vote.

“While the underlying strength of the economy is pretty good, at least in comparison with other, similar countries, we are entering a period where growth will slow, inflation will rise and borrowing will be higher.

“None of these things are good for the general economy and are certainly not encouraging signs for the motor or fleet industries or for private or business motorists. These are going to be reasonably unpredictable times.

“That is today’s real story but, having said that, there are some points of interest in there. Primarily, there is an underlying push towards ULEV technology that can be seen in the changes to salary sacrifice rules, the new company car tax rates for 2020-21 and even in the capital allowance for EV chargers.

“It seems pretty clear that the Government envisages us driving around around in largish numbers of electric and advanced hybrid vehicles within five years which, in our view, is a good match for the rate of development of EV technology. This will probably help to power new car sales.

“It is also interesting to see the commitment that is being made to road building schemes, especially on a localised infrastructure level, although the exact details have yet to be announced.
“This is a Government that continues to be committed to cars, vans and trucks as the most popular means of personal and business transport right across the country. “

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