Be clear about the facts on salary sacrifice cars

If you read nothing else, read this …

  • Employers must ensure the wording they use when communicating salary sacrifice car schemes to staff members is not misleading.
  • Employees need to be clear that they do not own the car, the breakdown of the calculations and what the commitment really entails.
  • Paper and electronic communications must be ongoing, not just at launch.

Employers must make sure staff understand the terms of a salary sacrifice car scheme, especially as far as tax is concerned, says Nic Paton

The principle behind salary sacrifice seems simple enough: employees sacrifice a portion of their gross salary to gain an alternative benefit at a beneficial tax treatment. But the detail can be complicated, particularly when it comes to ensuring staff understand the arrangement fully. It is vital, therefore, employers get the structure of a scheme right from the word go, deliver and communicate it clearly to ensure employees fully understand what is involved and avoid any confusion, and ensure HM Revenue and Customs (HMRC) is happy when it comes to oversight.

HMRC takes the view that salary sacrifice is about varying an employee’s terms and conditions because it relates to remuneration. To that extent, it considers this a matter for agreement between an employer and employee, so HMRC does not advise organisations specifically on how to set up schemes.

Matt Sutherland, chief operating officer of car leasing firm Alphabet, says: “When [employers] set up a car salary sacrifice scheme, HMRC will want to see evidence that the salary sacrifice is effective. This normally requires a change in the contract terms of staff. HMRC will want to see employment contracts of salary sacrifice users to make sure they have given up their contractual right to some cash remuneration in return for receiving a car as a benefit in kind.”

Ian Hughes, commercial director at Zenith, adds: “HMRC will be interested in how tax and national insurance contributions are applied. It needs to be creating the correct amount of revenue in relation to the tax regime. It will also review how the P11D collection mechanism is operating.”

It is also imperative that employees understand what they are getting into. In all communications, employers must clarify the status of employees’ ‘ownership’ of the car, how calculations break down, what the sacrifice includes, and the duration of the agreement. Employers must, therefore, ensure the wording they use cannot be seen to be misleading. Helen Fisk, AutoSolutions manager at ALD Automotive, says: “Employers must make it clear that the employee does not own the car, that they are being provided with it for a period of time.”

Hughes adds: “I have seen people’s eyebrows raise when you start to talk about benefit-in-kind tax or they will say things like ‘but I thought I was the owner’.”

Communication methods such as posters, staff seminars, FAQs, presentations and intranet ‘walk-through’ movies are all good ideas. Providers can also help with this.

“There will probably need to be a balance between electronic and paper communications,” says Fisk. “As well as communication around the launch, there will need to be ongoing communications.”

Providing access to independent tax advice can also help to ensure staff fully understand the scheme.

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