Offering cars to employees via salary sacrifice arrangements continues to be of interest to employers across many sectors and the number of schemes being implemented is growing month by month.

Some of the questions we get asked on this type of arrangement seem to crop up on a regular basis so we share twenty of the more common ones below together with our response which we hope you find of interest.

FAQs

Q1. Is this the same as other salary sacrifice arrangements?

A: In principle, yes. The employee agrees to give up part of their (taxable) pay in return for something else, in this case the use of a company car.

The one main difference is that, with most salary sacrifice schemes, the "something else" is usually non taxable so that the employee saves tax and NI on the salary element used to get this tax-free benefit. However, a company car is always taxable so in this case, taxable pay is replaced with a taxable benefit.

Q2: What is HMRC's view of salary sacrifice being used for company cars?

A: HMRC is absolutely fine with such an arrangement. Why wouldn't they be? They're still getting their "pound of flesh" i.e. tax on the company car. This contrasts with their view of the (now closed) arrangements such as canteens and computers which HMRC believed were exploiting legislation to generate tax savings.

Of course, any salary sacrifice scheme not set up properly will come under scrutiny by HMRC at some point, irrespective of whether taxable benefits are being declared or not.

Q3: Can any employer do this?

A: In theory, yes. There is no minimum requirement, or any requirement to offer the arrangement to all staff, so even just one car can be provided in this way.

That said, however, if savings is the key driver (pardon the pun !) then you really need to be a decent sized employer with a decent enough order for cars to take full advantage of any savings to be made.

Q4: Does it cost the employer anything to provide these cars?

A: Ideally, no. Normally schemes are set up in such a way that employees pay the full cost of the car by way of their salary sacrifice. Employers may even save some money by way of reduced NI costs. However, there may be indirect costs to the employer, e.g. in increased admin.

Q5: What's in it for the employee?

A: They get to drive a new car, fully taxed, insured and serviced for a much lower cost that they could ever get themselves independently. This is through a mixture of tax/NI savings and corporate discounts.

Obviously, this is on the major assumption that the scheme is effective. Get the sums and the mechanics (another pun !) wrong and the employee could be out of pocket.

Q6: Is it true that salary sacrifice cars can replace the traditional company car fleet?

A: In theory, possibly. However, this is a potential minefield when it involves employees who absolutely need their car to do their job. Remove company cars and you could have a situation where the employee does not opt for a salary sacrifice car to replace his previous company vehicle. Due to the contractual issues behind salary sacrifice, an employer cannot normally force an employee to enter into such an arrangement.

It is for this reason that salary sacrifice cars are normally offered to non company car drivers (or company car drivers as a second car) as they are intended mostly to be used for private not business purposes.

Q7: Is this another of those fancy "employee car ownership schemes" where the employee owns the car to avoid tax charges?

A; No. These arrangements involve the provision of company cars which are reported on P11Ds as such and the employee pays tax on the benefit value. At no point does the employee own the car.

Q8: Does this only work for small cars?

A: The answer used to be yes for the simple reason that it was the smallest cars that had the lowest CO2 emissions and ergo the lowest P11D tax charges and so these cars were the only ones that used to be cheaper all-round than the salary foregone.

However, many cars are now very environmentally friendly with low tax charges and so it is possible to get a wide variety of cars, including many family or larger ones, under salary sacrifice and still be quids in.

Q9: What extra work is involved for the employer?

A: Admin mostly around employee contracts, car orders, financing the cars, payroll adjustments, joiners, leavers and P11D reporting, This is on top of the setting up of the whole thing and communicating the benefits of the scheme to staff.

This is certainly not for the faint hearted when a lot of employees are involved but it can be relatively painless if done right and with the right advice along the way.

Q10: Do we have to get cars from one of the "salary sacrifice for cars" providers?

A: Contrary to popular belief, NO ! Any car supplier can be used, the same as for normal company cars. What we would say, though, is that for larger schemes involving many employees/cars, one of the specialist firms will be able to offer much more support and systems around the admin and processing of orders which could be invaluable to the employer and could encourage take-up by employees if it is made as easy as possible.

Q11: What if an employee changes their mind once they get the car?

A: Tough ! The salary sacrifice documentation should prevent them from doing so - unless there is a change in their personal circumstances which qualifies as a "lifestyle change" e.g. marriage, death of a spouse, divorce, etc.

Q12: How long does the salary sacrifice last for?

A: It varies. Some last for 12 months, others for 24 months and many other variations inbetween. It is up to the employer to decide the standard contract length when designing the scheme.

Q13: What happens to the car at the end of the period?

A: It is returned to the employer who then returns it (usually) to the car provider (assuming the car was not purchased outright).

Q14: What happens if an employee leaves before the agreement ends?

A: There may be early termination charges for the employee to pay back to the employer as compensation for any charges the employer may incur in returning the car early to the provider. This depends on the circumstances and the specific rules in place with the employer. If the employer pays any such charge on the employee's behalf there will likely be tax implications on this.

Q15: What other tax related issues do we need to be careful about?

A: The usual salary sacrifice ones such as National Minimum Wage levels and impact on internal payments such as overtime, sick pay, etc as well as some benefit in kind issues around private fuel. And the obvious one around whether the salary sacrifice is actually legally valid.

Q16: Do we need to change the contract of employment?

A: Some car providers say no, just get the employees to sign a statement. We always recommend that the actual contract of employment is changed. Forget salary sacrifice for a minute, any other time you were changing (reducing) an employee's legal salary, all parties would insist on a new contract for clarity. Why should this be any different. Do it properly or not at all in our book, it just isn't worth it.

Q17: Do we need scheme "rules"?

A: You can try to get by without them but that is not to be recommended. Employees need to know what their obligations/costs are especially with situations like early leavers, redundancies, pregnancies, etc and all the HR side e.g. drink/driving, etc.

Q18: Do we have to get approval from HMRC?

A: No, but it is recommended. Company cars are high value benefits in kind and so any mistakes on the tax side could be significant.

Q19:Why isn't everyone doing this?
 

A: Good question......Well, actually, there are some valid reasons such as not wanting the hassle and extra tax reporting, not wanting to encourage frivolous driving, fear of health and safety legislation, high staff turnover, etc etc.

Q20: Does this also work for company vans?

A: Yes but there are different aspects to consider around the financials given the different tax rules for company vans. This hasn't really taken off yet for vans, mostly because of this (and also because of lack of demand in honesty).

 

Conclusion

Salary sacrifice for cars is a really worthwhile benefit to offer staff in the right circumstances. We hate the phrase, but it is a "win-win situation" - employees drive about in a new car with no hassle and at much less cost than they would normally pay, employers (potentially) save some money but, more importantly, they have a much happier workforce and an extra weapon in the recruitment battle.

Despite what some car providers, or advisors, may lead you to believe, there is nothing overly complicated about such an arrangement. Yes, there are some fundamentals behind salary sacrifice that you absolutely must get right, e.g. the contractuals, and there is also the extra P11D reporting to think about but nothing too horrendous for the vast majority of employers.

It goes without saying that we would always recommend independent (unbiased) advice when thinking about setting up such a scheme. Hint, hint !!!

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