Taxation

Cash Or Car – Changes To BIK

Changes To Benefit In Kind Calculations For Company Cars

As part of the Autumn Statement in November 2016, the Chancellor announced some changes to the way that drivers will be taxed on their company car. Whilst the Government’s primary aim was to address the increasing popularity of Salary Exchange vehicles, HMRC have confirmed that it will also apply to any employee giving up cash in exchange for a car. This affects all company cars ordered on or after 6th April 2017.

In scope

  1. The legislation directly affects any employee who has the choice of a cash allowance or a company car, and chooses to take the car.
  1. Where the value of that cash allowance is greater than the CO2-based Benefit in Kind value of their car, the Benefit in Kind incurred by the driver will be based on the value of the cash allowance, even though the employee does not receive it.

Out of scope

  1. If the vehicle is a ULEV (Ultra Low Emission Vehicle) with an emission of 75g/km of CO2 or less, the Benefit in Kind value will still be calculated using the old rules, (based on CO2) and will ignore any cash allowance entitlement.
  1. If an employee does not have the option of a cash allowance, they will not be impacted and will continue to be taxed using the old rules (based on vehicle CO2).
  1. The legislation does not affect any existing vehicles or any vehicles ordered on or before 5th April 2017.

What does this legislation mean for an employer?

This legislation is aimed at any Salary Sacrifice or Salary Exchange schemes where the employee will be taxed on the higher value of either the CO2-based Benefit in Kind or the Gross Salary Exchange.

However it also impacts any ‘normal’ company vehicles where the employee was offered a cash option or a car. If the employee chooses the car they will pay income tax on the higher value of the traditional CO2-based Benefit in Kind or the cash allowance they chose not to take. If the employee chooses cash they will continue to pay income tax on the cash allowance as they do today.

An assessment needs to be performed for any company car driver who has an entitlement to a cash allowance but doesn’t take it and instead orders a company car on or after 6th April 2017.

The driver will not be affected by this legislation if:

  1. They choose an Ultra-Low Emission Vehicle (sub 75g/km CO2)
  1. Their cash allowance is lower, throughout the life of the car, than the CO2-based Benefit in Kind

If the vehicle is ordered prior to 6th April 2017 it will retain the CO2-based Benefit in Kind treatment until it is returned, the term is amended, or the vehicle changes driver.

What happens if a driver’s order changes?

If there is a change in model by the driver or manufacturer, even if the driver has ordered their vehicle prior to 6th April 2017, it will be caught by this legislation.

Can we pre-order cars?

HMRC have stated that they will be looking out for abuse and they expect any orders to be delivered in a normal timeframe for that make and model. They would expect all vehicles ordered before April to be delivered within 8-16 weeks to avoid being impacted by the new legislation.

What does the driver have to do by 6th April 2017?

The driver must have signed the order form either in paper or electronic format prior to 6th April 2017. If the order is on paper, we would expect it to reach us in a timely manner.

What happens if a cash allowance the driver didn’t take changes during the contract term?

We are pending final clarification on this from HMRC.

What happens if the driver makes a trade-up payment?

We are pending final clarification on this from HMRC. We currently understand that any trade-up payment made by the driver is used to reduce the CO2-based Benefit in Kind value. This lower value means that there is more chance of the driver being taxed on the cash allowance but it depends on individual vehicle choice, trade-up payments and cash allowance. Each case will need to be calculated individually.

What happens if the driver receives a trade-down payment?

We are pending final clarification on this from HMRC. We currently understand that any trade-down payment is used to reduce the cash that the driver would have paid. For example if the driver had an entitlement to a £5,000 allowance and receives a £1,000 trade down, then the cash allowance is adjusted to £4,000. This means that the driver is more likely to be taxed on the CO2-based Benefit in Kind for the vehicle. However it depends on individual vehicle choice, trade-down payments and cash allowance. Each case will need to be calculated individually.

What happens if we recontract a vehicle?

These changes only impact vehicles which have emissions of more than 75g/km of CO2 and where the driver has an entitlement to a cash option. Changing the term on a vehicle will only cause a change if the vehicle was ordered under the pre-April 2017 rules and is amended post-April 2017 which means that the new rules will apply.

Should you have vehicles that fall into this category which need a change in term, we would recommend that you do it prior to 6th April 2017 to ensure you maintain the current taxation rules, if you have a cash allowance option for your drivers.

Should the mileage only need to change, we understand that these will not be caught by the new legislation but await clarification from HMRC.

What does the driver need to tell HMRC?

Like today, a driver should call HMRC to advise them that they have taken a car and provide the CO2, fuel type, list price and any capital or monthly payments made. In addition, for any vehicle ordered after 6th April 2017, a driver should advise HMRC if they had an entitlement to a cash option and the value of that option. HMRC will calculate the higher value and tax the driver based on this value.

Any employers who tax drivers through payroll rather than via PAYE will need to perform this calculation to identify the higher Benefit in Kind value on which the driver will pay income tax.

How does the P11D form change?

This is only relevant if you have a Salary Sacrifice scheme or your traditional company car drivers are entitled to a cash allowance which they have foregone to enter the car scheme.

Going forward, all orders placed on or after 6th April 2017 will need to be assessed each tax year and the higher value reported on the drivers P11D form for them to pay income tax on.

The value needs to be reassessed each tax year because the CO2 percentage rates change and therefore the higher value may change year-on-year.

Any orders placed on or before 5th April 2017 will continue to be taxed on the CO2-based Benefit in Kind value, until the vehicle transfers between drivers, or the term is amended.

Do we need to submit a P46 form to notify HMRC of new vehicles?

We are pending clarification from HMRC but we currently understand that HMRC has requested no one notify them based on this new scheme until the P11D submission due in 2018 and any underpaid tax will be adjusted via the  employees PAYE at that date.

How does this impact employer accounting?

As an employer you will need to pay Class 1A National Insurance on the higher of the two values for any orders placed after 6th April 2017.

As with the driver position, the higher value needs to be assessed on an annual basis to ensure that it is still being used.

Can we amend employees’ contracts to remove the cash option?

HMRC have confirmed that providing this is done prior to April, and in the event of new starters – before they sign their employment contract, then the drivers will not be caught by this legislation

What happens to vehicles ordered in the cut-over period?

HMRC have confirmed that the key step is the driver physically signing the order form or electronically ordering the vehicle. Therefore, any orders placed on or before 5th April 2017 will continue on the old CO2-based Benefit in Kind scheme only (unless the order is changed). Any orders from the driver dated 6th April 2017 or later, will fall under the new scheme.

For a period of time it will be important to know the date the vehicle was ordered by the driver and maintain this information for the duration of the P11D submissions to ensure they are based on the correct taxation system.

Please be aware that this document was produced based on the information from our funder, Arval. They are pending further clarification from HMRC.