Salary sacrifice started life as a benefits incentive - a way to streamline tax effectiveness for employers and employees alike. It offers financing for company cars by giving the employee the option to sacrifice a monthly element of his/her salary in exchange for vehicle payments. These payments are subtracted before tax, and while they accrue Benefit-In-Kind tax demands (BIK) on the vehicle payments, the amount of BIK paid is normally less than the amount of NIC and income tax saved.

For an employer, this benefit translates into savings too: around one third of the savings made by the employee, at around £300 per car.

All of this sounds good, from both sides of the fence. But is a salary sacrifice scheme a sensible alternative to employee car ownership of cash incentives? We take a look at the real benefits and costs to your fleet.

Big advantages and key warnings

There are some big, keynote advantages built into the salary sacrifice model. Running a salary sacrifice scheme enables you to put the most attractive possible offer on the table at hiring time. It’s a way of making your proposition sound appealing, by elevating the profile of non-monetary benefits while adding the hook of extra tax relief.

In the quest to attract and retain good talent, being able to offer an employee a potential £900 annual saving on NICs and income tax bills, while financing a company car at the same time, is a considerable benefit. The £300 per vehicle saved at your end of the spectrum doesn’t hurt either.

Added to the ‘employee attraction’ side of the ledger are the potential savings to your workforce on normal vehicle maintenance and running. Because salary sacrifice schemes tend to link with better levels of manufacturer backup (provided to the company leasing the vehicle, but passed straight to the employee), your employees get more servicing for less money - savings of up to £1k every year.

There are downsides to the employee attraction model, however. If an employee leaves the company before his/her lease is paid off, you’re suddenly stuck with a vehicle, and a payment term that needs to be completed.

To avoid this potential pitfall, you can stipulate that your salary sacrifice fleet schemes are novated. Novation puts the legal responsibility for paying the lease with your employee, but gives you the ability to do the actual leasing. In this way, the employee remains liable for lease payments until the end of the term, safeguarding you from penalties should she/he terminate the contract early.

Green advantages

It’s easier to go green when you control the vehicles your workforce is driving. Running a fleet of company cars lets you stipulate maximum CO2 emissions for each vehicle - i.e. the salary sacrifice scheme only comes into effect when used to purchase vehicles that emit below a threshold level. Running a green fleet, in turn, ensures your company is able to stay on the right side of tax penalties or emissions charges levied at less environmentally friendly vehicles.

A smart move for funding - or a nightmare waiting to happen?

Handled properly, salary sacrifice can appear to be a smart way to fund your company fleet. The workforce salary pays the lease hire, and both you and the employee walk away with a noticeable tax benefit.

However, funding a fleet through your employees’ salaries is not without risk. It’s important to plan for contingencies that don’t, at first, appear obvious.

What happens if your employee goes long-term sick, or takes maternity leave? What will you do if an employee leaves your company completely, but leaves behind a car with an unpaid lease and un-repaired damage?

In instances of long-term absence, whether planned (like maternity) or unplanned (long-term sick leave), the salary sacrifice contribution is still required to pay the lease on the vehicle. As your employee’s salary gradually dwindles, she remains in possession of a car that has to be paid off. If she isn’t footing that bill, you are.

Similarly, if your employee leaves you with a damaged vehicle and there are no contractual clauses to shift end-of-employment ownership of the car to her, you may end up liable for repair costs.

The resolution to problems like this lies in the employee’s - and your - conception of the arrangement you have entered into. At the time of contract, the salary sacrifice arrangement must be drafted in a way that makes it clear what responsibilities lie with the employee, including instances where changing circumstances alter the amount of pay they receive from you. Ultimately, you need to work out whether the fleet vehicle is a company benefit, which is retrieved by the company at the end of the employment or salary term, or an employee benefit that becomes the employee’s sole responsibility, even in the event she no longer receives a cheque from you every month.

It’s often the case that you can’t ‘reverse’ a benefit to an employee: so once she has the car, it’s hers for good. If you don’t plan for contingencies at the contract stage, you could end up with a costly inheritance and no vehicle to show for it.

Possible changes to salary sacrifice

Salary sacrifice has been the subject of recent discussion in Government offices and the media. As yet no changes have been formally introduced, but the fleet industry has heard concerns relating to taxation and salary sacrifice schemes.

These issues involve potential shortfalls in other NIC-related areas, potential tax-avoidance and an increased workload for HMRC. Salary sacrifice creates extra paperwork for the Revenue, a subject that has been targeted by the Office of Tax Simplification, as well as taking NIC away from pensions and other benefits.

Pricewaterhouse Coopers was commissioned by Tusker, a salary sacrifice specialist, to do a report on the scheme. Its conclusion was that salary sacrifice is not ‘tax negative’ for HMRC. In addition to accruing BIK taxes, salary sacrifice allows HMRC to collect extra revenue in fuel duties, insurance premium taxes and vehicle registration.

However, the concern, as yet unrealised, is that the Government may alter the rules on salary sacrifice for fleet vehicles - which are taxed as BIK - along with other salary sacrifice benefits, which aren’t.

Do you operate a salary sacrifice scheme for your fleet vehicles? Have you encountered any problems, or are you concerned that the rules might be about to change? Let our community know your experiences on Twitter or LinkedIn.

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