Cash or benefits agreements - Watch out for the transitional provisions for company cars!
Our recent conversations with clients have revealed that important aspects of HMRC’s Optional Remuneration Arrangements (OpRA) rules are not yet fully understood. Ian Gadie, Business Tax Manager, explains how the rules apply to your business and your employees.
Since April 2017, HMRC’s OpRA rules have applied when employees give up the right to an amount of earnings in return for an employer-provided benefit, either via salary sacrifice or a contractual salary offer. Our Tax Insight explains the rules in more detail, but one of the key points is that if the cash alternative is greater than the taxable value of the benefit in kind, the higher amount is the taxable amount.
How are company cars affected?
The tax treatment of cash or benefit agreements for company cars is effectively phased in between 6 April 2017 and 5 April 2021. If an employee had the option of a company car or a cash allowance instead, and this agreement was in place before 6 April 2017, the OpRA rules are not applied until that agreement is varied, renewed or modified before 6 April 2021. From 6 April 2021, the OpRA rules apply even if the agreement was in place before 6 April 2017.
There are other rules that also apply to company car: very low CO2 emission cars (less than 75g/km) fall outside of the OpRA rules, and some replacement of company cars between 6 April 2017 and 5 April 2021 does not trigger the OpRA rules.
What does this mean for your business?
It is common for company cars to be replaced every three years, or earlier if the mileage of the car is very high. Consequently, it is likely that arrangements in existence before 6 April 2017 will be renewed before 6 April 2021, and the OpRA rules will apply immediately to the new company car as soon as it is provided.
This has tax implications for the employees, as they may have a higher taxable benefit on which to pay tax, and also for the employer, as the higher taxable benefit is also liable to Class 1A NIC at 13.8%.
What do you need to do?
Employers need to ensure they are aware of these tax rules when replacing company cars, and also providing company cars to employees for the first time.
Advice and guidance is available from PKF Littlejohn, and if you have any concerns please get in touch with us. Please contact Ian Gadie on email@example.com or +44 (0)207 516 2256, or your usual contact at PKF Littlejohn, for further advice.