ATTRACT MOTIVATE RETAIN

Transcription

1 ATTRACT MOTIVATE RETAIN A Salary Sacrifice Car Scheme white paper from the UK s leading fleet services company.

2 A LEX AUTOLEASE WHITE PAPER SALARY SACRIFICE CAR SCHEME 1 A CAR FOR ALL EMPLOYEES As a method to obtain a car by means of employment, Salary Sacrifice is trying to find its place within the industry. Some fleet and employee benefit commentators are convinced it has a big future, others suggest it doesn t have a future at all and maybe think it can only provide another niche alternative to the traditional company car. For an increasing number of Fleet Managers, Financial Directors and HR representatives it has reopened the same interest as Employee Car Ownership (ECO) Schemes did twenty years ago. Regardless of your viewpoint, Salary Sacrifice has become a hot topic, a new framework to turn existing legislation into a financial advantage for both the employer and employee. However, that is where the similarities end. Salary Sacrifice is very different to an Employee Car Ownership Scheme on many levels, for instance the ownership title does not pass to the employee so it remains very much classified as a company car from a Benefit In Kind (BIK) perspective. One thing is certain, Salary Sacrifice is providing a much needed breath of fresh policy design into a mature industry scarce of true funding innovation and one that is capturing the interest of fleet decision makers and suppliers alike. SALARY SACRIFICE POTENTIAL TAKE UP 2% 15% With potential take up considered to be anything between 2% and 15%, only time will tell if Salary Sacrifice will be as successful as many predict. Lex Autolease has been following its progress within the industry, investing in its development and consulting on the subject for more than six years. Many customers are now very interested and major organisations are already operating or are in the process of implementing a Salary Sacrifice Scheme with Lex Autolease and other suppliers. The aim of this white paper is not only to provide some useful background information but also to raise questions regarding the future of Salary Sacrifice, such as: Will it ever be considered more than a niche product? Will it eventually become a product to replace the traditional company car scheme for all employees? THE BASICS OF SALARY SACRIFICE The concept of an employee sacrificing part of their salary in return for a company provided car has been discussed at length in the Fleet and Employee Benefit media for some time. Salary Sacrifice has become a hot topic Employers, large and small, are keen to offer additional benefits to their employees as a recruitment and retention tool and for the few allowed benefits, Salary Sacrifice is a tax efficient mechanism that can achieve this aim. Salary Sacrifice works because it effectively reduces an employee s gross pay, the amount that is normally exposed to PAYE and National Insurance. Instead of being paid their full salary, an employee can receive instead an equivalent non cash benefit such as child care vouchers. Her Majesty s Revenue and Customs (HMRC) have published various guidance notes on what their role is in assessing the viability of Salary Sacrifice schemes (these are available to download from their website). It is advisable for employers to request that HMRC approve the scheme arrangements (HMRC will only do this after the first transaction). Assuming the Salary Sacrifice will be ruled effective then the employee would then pay less income tax and both the employee and the employer would be liable for reduced National Insurance Contributions providing the employee is over 21 years of age (under 21 s are now exempt from National Insurance Contributions). As less tax and National Insurance Contribution is payable, it provides a discount towards the cost of the benefit provided, making it financially attractive for both the employee and employer. However, there is a twist as the car is treated as a company car and therefore deemed a Benefit In Kind. This does mean company car tax is payable by the employee with the employer liable for the Class 1A National Insurance Contributions. This additional cost is an example why scheme policy design becomes very important if cars are offered under Salary Sacrifice. Company car tax is based on a calculation that includes a number of variables including the amount of CO 2 per g/km its engine emits, the type of fuel used and the taxable list price of the car. The higher the official CO 2 figure of the car the more tax is due which has the potential to wipe out any savings from the reduced taxable income. This is important to note as it s most common to fix the salary sacrificed by the employee throughout the contract. However, with the Taxable Benefit Charge percentage typically rising by 5% for diesels cars and 8% for petrol cars from 2014 levels to 2018, the structure for determining the salary sacrificed needs to be considered carefully if employer savings are a main objective.

3 A LEX AUTOLEASE WHITE PAPER SALARY SACRIFICE CAR SCHEME 2 When considering a Salary Sacrifice scheme it is important to remember that it is intended to operate as a standard company car provided through a Contract Hire arrangement between the employer and the leasing company even though the employee contributes towards its cost though the Salary Sacrificed. All the advantages of fixed cost motoring that a traditional company car driver and their employer enjoy are true and still available under Salary Sacrifice. WHO BENEFITS? This depends on the company s objectives, how the scheme is designed and the capability of the supplier. Despite the fact a company car has significant tax implications for the employer and employees, surveys regularly confirm that it remains one of the most desired benefits an employer can offer its workforce. To some, it can be the difference between accepting a job offer or not, leaving or staying, it often has a direct impact on morale. It is widely accepted that there is a big financial benefit to the employee if they receive a company car compared to operating a similar vehicle privately. The benefits do not end there. Company car drivers are sheltered from the risk of unforeseen running costs; a good fleet management company is also on hand to arrange for servicing and repairs and to deal with any issues that arise from accident management to end of contract renewal. RULE 1: Salary Sacrifice works best for low C0 2 emitting cars It is all these advantages and many more, that make a company car so appealing for an employee. For many years employers have tried various products and schemes, such as Personal Contract Purchase, to extend the benefit to the whole of its workforce not just the job grade or job need drivers, who are often entitled to a company car as part of their contract of employment. Salary Sacrifice is seen as the current and most promising method to provide a company car to those who are not traditionally entitled to a car or cash allowance with little or no additional expense to the employer. The driver does have to sacrifice some of their salary to fund the cost of providing the car but it is often competitive, if not significantly cheaper, than funding a similar vehicle elsewhere in the marketplace due to the associated tax advantages and the high levels of corporate discounts available on both the purchase price of the car and its servicing costs. Not forgetting all the other advantages that are associated with fixed cost motoring and fleet management. With Salary Sacrifice as an embedded staff benefit, an employer can differentiate themselves from their competitors, helping to attract the quality workforce they wish to recruit and retain. RULE 2: Plan and implement it as a staff benefit THE CAR AND CASH ALLOWANCE These are natural progressive questions to be considered but care and extra thought must be provided in how such a scheme will operate. It is in this area that Salary Sacrifice is trying to find its place as an employee benefit. If they so wished and have enough salary, an employee who already has a traditional company car could still take a second company car via Salary Sacrifice with all the same advantages to both the employer and the employee, but this doesn t get to the core of the question. Salary Sacrifice could be provided as the only method to obtain a company car for the employees who receive a company car or cash allowance but with limited financial benefit to the employer. These employees would receive an additional amount of salary to either help fund the vehicle they choose under Salary Sacrifice or retain as a cash allowance towards a private car. Although it s an option, the employer would gain limited financial benefit replacing an employee s existing company car with a Salary Sacrificed company car as there is no difference in the amount of National Insurance due on the employees taxable salary. However, there is a potential financial benefit to the employer if a driver is tempted into the scheme instead of receiving the cash option as the employer could save their National Insurance Contribution due on the additional retained salary. One of the attractive qualities of Salary Sacrifice is that it helps to remove the risk often associated with employees who exercise the cash option and sometimes choose to drive older vehicles. It provides these employees the opportunity to drive well maintained and modern vehicles using the latest technology with low emissions and high fuel efficiency; it helps to improve their safety and helps with employers Duty of Care responsibilities. RULE 3: Understand the cost potential

4 A LEX AUTOLEASE WHITE PAPER SALARY SACRIFICE CAR SCHEME 3 We can conclude that it would be advantageous, both financially and from a Duty of Care standpoint, for the employer to entice current cash takers into a Salary Sacrifice scheme. However, if the aim is to replace the traditional company car scheme with Salary Sacrifice, an employer would see little comparative financial benefit which is why it is not recommended. Of course, this doesn t mean that it can t be done, especially if cost savings are not the main reason for change. THE FUTURE OF SALARY SACRIFICE? It could be said that the future of Salary Sacrifice is dependent on whether any changes in legislation are introduced to control or restrict its use. Even though the concept of sacrificing salary for a non cash benefit has been available for some time, the introduction of a high value asset such as a car might just cause the government, through HMRC, to revisit the rules. RULE 4: Policy design is the key to a successful scheme Salary Sacrifice schemes are vulnerable in much the same way as some commentators see Employee Car Ownership Schemes, some are anticipating a change in legislation that will kill off ECO schemes entirely such as a significant negative change to the Approved Mileage Rates per business mile. It hasn t come yet, in fact the opposite happened from 2011 where the rate was increased so maybe it never will? ECO still presents a strong option for some employers and currently Salary Sacrifice is a real opportunity for those seeking an additional staff benefit so why not look into it? It can only gain momentum as long as current legislation supports it. The interesting future for the fleet industry does not sit with the view that it will just be used as a niche product. We have seen that replacing a traditional company car scheme with Salary Sacrifice has limited financial benefit to the employer but what if Salary Sacrifice could offer a company car to every employee under one true scheme design? The only difference is that some employees would receive an additional allowance due to their job grade or need. The fleet industry is witnessing a move by various organisations (especially large corporates) towards a total reward package for its employee base. 5% of companies currently offer this benefit [PWC] Effectively, employees receive an additional cash allowance in the form of an additional amount of salary to pick and choose the benefits that suit their needs right now childcare vouchers, a cash lump sum, private heath care, additional holidays and maybe even a company car? It could be viewed as a sensible move as companies continue to seek simplicity and cost control. If employers move towards a cash based total reward package, leasing companies will need to be able to support the scheme design. They will need to offer a company car in a simple, innovate and flexible package to compete with the other benefits available, otherwise there is a real risk that the cash allowance will be used for other benefits. This has the potential to tempt the employee into buying their own less expensive, older car for business use that will raise Duty of Care concerns. For this to be effective, leasing companies and employers will need to rethink the way a car policy is designed. Providing the basic infrastructure is possible but ideally - and this could be considered the ultimate aim it would need to fit all employees using one standard set of rules and pricing structure for it to work efficiently, thus ensuring fairness and equality. Salary Sacrifice has opened the door for this to be explored as it could provide real advantages to a large proportion of the workforce, however, the rules and its consequences must be understood. OPERATIONAL HOT SPOTS As Salary Sacrifice finds its place within the industry it s important to understand the risks associated, mainly with unanswered questions. To supply a company provided car under a Salary Sacrifice arrangement is relatively new to the market. It is advised that any company wishing to implement a Salary Sacrifice scheme seek legal and tax advice to fully understand the grey areas surrounding VAT and Regulated Hire under the Consumer Credit Act, especially as the industry has not yet reached a formal conclusion in some areas. It is recommended that any new Salary Sacrifice scheme, regardless of the benefit, seeks post implementation approval from HMRC to ensure it is effective and the VAT, Tax and National Insurance Contributions are properly accounted for, however, the contract that agrees that salary can be reduced is a matter of employment law not tax law. RULE 5: Understand the risks, seek advice Further consideration must be given to the main operational process and pricing parameters required. These include payroll administration and reporting, the quotation contract mileage, motor insurance, staff turnover with early terminations and contingency funds. Ensuring employees do not fall below the national minimum wage has always been required and consideration should be given to potential national minimum wage increases over the employees

5 A LEX AUTOLEASE WHITE PAPER SALARY SACRIFICE CAR SCHEME 4 period of use. In addition the Financial Conduct Authority has a greater focus on affordability so additional checks should be considered. It is also important to remember the change in accountancy standards under consideration that propose a company car acquired through contract hire sits on the employer s balance sheet. In addition, employees should be made aware of how opting into a Salary Sacrifice scheme can affect their entitlement to earnings related benefits such as maternity leave or even the advantage of minimising any reduction in child benefit payments for middle earners. IN SUMMARY There is no doubt that Salary Sacrifice provides an exciting opportunity to those companies who wish to extend the benefit of a company car to their entire workforce. Momentum is growing within the industry as it becomes the hot topic. Leasing companies are jostling for position, presenting their best supply and support systems. Salary Sacrifice won t suit everyone and for some time yet it will remain a niche product offering but given the correct support and clarity in legislation it might just provide the framework for a total mobility and reward solution to materialise. Extending a company car under Salary Sacrifice to all employees is possible but to deliver the ultimate one scheme fits all solution is a longer term ambition and may require an almost revolutionary rethink in traditional scheme design. ABOUT OUR CONSULTANCY SERVICE The Lex Autolease Strategic Fleet Consultancy team works with board directors and senior managers to identify how the provision of fleet can better support key business objectives. Our consultancy covers cost reduction, policy, tax, the environment, duty of care and fleet delivery strategy. In addition to core fleet issues, we consult on related areas such as fuel and cash schemes. Our consultants have depth and breadth of knowledge in a range of technical areas and have prior experience in major advisory firms or industry. We combine leading edge thinking with the operational experiences that come from being part of Lex Autolease, the UK s leading fleet provider. To find out more, contact our dedicated Strategic Fleet Consultancy team or visit: lexautolease.co.uk call: fleetconsultancy@lexautolease.co.uk SS WP / LA8029 / 07-14