Is cash king?
So far in this series we have considered all of the major forms of vehicle finance, including employee car ownership schemes (ECOS) and salary sacrifice schemes.
This month we are going to step back and look more broadly at the issues that arise when an employer stops providing a company car and simply provides the employee with more salary instead.
The company car tax system clearly disadvantages many company car drivers. For some, the company car no longer represents good value because the tax they pay exceeds the cost they would incur if they simply took extra salary from their employer and acquired their own car.
Some employers – particularly those with lots of ”perk” cars – have long believed that the administration of a car fleet is an unnecessary burden. In the mid-1990s American businesses operating in the UK started to move away from company cars and simply added an amount to their employees’ salaries to compensate for the withdrawal of the car. The perk car culture is less well established in the USA and these companies had always questioned whether they should be providing company cars. Rising levels of car benefit tax gave them the opportunity to withdraw this benefit.
If their company car is withdrawn, many employees will still need a car in order to carry out their jobs, so they pay for this themselves out of their increased salary, receiving a mileage allowance for each business mile driven.
Employers have adopted several different cash-for-car approaches:
– Some have given their staff the option to have a car or take extra salary. Employees like to have a cash option available to them, even when they don’t take it up.
– Some have introduced employer-sponsored personal contract purchase schemes (PCP), in which they introduce their staff to a leasing company that provides fully maintained cars.
– Some have introduced employee car ownership schemes (ECOs), which change the legal structure of the company car scheme but leave the operational aspects largely unchanged (see earlier article).
– Some have introduced salary sacrifice schemes (see earlier article).
– And some have stopped providing cars altogether, paid extra salary and left their employees to fend for themselves.
Cash-for-car schemes can generate significant savings. You need to decide who will benefit from these. If the company keeps them you may find it hard to encourage employees to opt out of their company cars. If they are shared between the company and the employees you have to decide how these will be split. If the savings are all passed to the employees you will encourage take-up but this is not ideal for the shareholders.
It makes sense to work with a leasing company to introduce a cash-for-car scheme, to help your employees get a car through a lease or PCP agreement.
Given the choice between cash or car, an employee has to decide which to take. They have to calculate their cash receipts and payments (including tax) under both scenarios, and a good employer will help them to do this. These calculations are complicated. Doing the sums and explaining them to a single driver is time-consuming but for a large group it is awesome. Once again, a leasing company can help here.
There is a danger that a badly set up cash-for-car scheme will fail to remove the car benefit tax from the employee. You should be wary of guaranteeing your employees’ payment obligations (or actually paying these liabilities) under PCP or PCH arrangements. You may trigger a tax liability.
In all cases, it makes sense to clear the scheme with HM Revenue and Customs.
If you offer a cash allowance instead of a company car, you will save the cost of the Class 1A National Insurance contributions, any cash allowance you pay to an employee in lieu of his company car will be fully taxable, you will pay Class 1 employer’s NIC and the employee will pay Class 1 NIC on the cash allowance.
You will need to pay a mileage allowance when the employee uses their private vehicle on company business. So long as this is not above the level of HM Revenue and Customs Approved Mileage Allowance Payments (AMAP) the employee will have no tax or NIC liability on these payments. If the mileage rate paid is less than the AMAP, the employee can claim the shortfall as an additional amount of tax relief in their tax return.
If the payment exceeds the AMAP levels, the excess over the AMAP level will be taxable at the employee’s marginal rate.
If you wish to adopt a cash-for-car scheme, it makes sense to pay the employee the full amount of the AMAP (on which they pay no tax or National Insurance contributions) and a lower level of cash allowance (on which they pay tax and possibly Class 1 National Insurance, and on which the employer pays Class 1A National Insurance).
This could be better than paying a higher cash allowance and a lower mileage rate.
You can give employees interest-free loans of up to £5,000 to help them buy their own vehicles. There is no income tax charge on this benefit so long as the loan is fully repayable, and it is indeed repaid and not written-off. This loan can be used as a deposit towards a finance or lease agreement and it will therefore reduce the monthly payments the employee has to make to the funder/lessor. In practice, most employers prefer not to offer such a loan.
You need to give very careful consideration to setting up a cash-for-car scheme and also decide whether any savings should be kept by the company or shared with the employees.
With cash-for-car there are a number of operational and HR issues to consider, and we will cover these next month.