Worth the sacrifice
Recognise that salary sacrifice is tried and tested
No doubt during 2014 we will continue to see many opinions and surveys concerning the take-up and viability of salary sacrifice for cars. While much of this commentary may be negative and highlight a myriad of potential pitfalls, risks and problems associated with salary sacrifice we should recognise that many employers (including the “Big Four” accountancy firms and several “Magic Circle” law firms) have introduced successful schemes that now help to maintain a motivated and loyal workforce.
Nowadays it would be very hard to argue that employees don’t want a degree of flexibility to choose how they wish to be remunerated. As many surveys tell us that a company car remains one of the most sought after benefits, a car scheme that enables employees to benefit from their purchasing power of their employer, and offers tax and National Insurance savings, should clearly help to motivate, retain and reward valuable employees.
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Understand the product
Recognise salary sacrifice for what it is: a superb employee benefit that delivers engagement, satisfaction and retention. It is a way to offer considerable savings to all of your employees through the power of corporate purchasing as well as tax efficiencies. A good salary sacrifice scheme compliments rather than competes with your existing company car offering whilst offering a compelling alternative to “grey fleets”.
Look at whether salary sacrifice is right for your company
This will include an assessment of take-up and any cost and time incurred in the implementation. There are ways to offset implementation costs through the structure of the scheme and salary sacrifice calculation, however a small amount of time will be needed by internal stakeholders throughout the life of the scheme. You should carry out an employee survey to assess potential interest and also assist in the design of the scheme.
You will need to have the ability to promote the scheme internally, working closely with your provider. If you do not have open internal communication channels it may not be a worthwhile and valuable addition to your employee benefits package as you will not be able to sufficiently promote its value to your employees.
From our experience a company is more likely to adopt a scheme where there is a large employee base, a high proportion of eligible employees and it has a pre-existing benefits platform. Other factors include having wide adoption amongst similar companies and a large proportion of cash takers.
Pay attention to the scheme policy design – lower-emitting cars work best
A contract hire car under 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 an equivalent non-cash benefit such as a car which by design could also form part of a flexible benefits package. As less statutory deductions (tax and National Insurance) are made, it provides a “discount” towards the cost of the benefit provided, making it financially attractive for both the employee and employer.
There is a further important detail. As the car is treated as a company car it is deemed a Benefit in Kind. This means 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 of why scheme policy design becomes very important if cars are offered under salary sacrifice. Ensure the available vehicle emissions are low, as the higher the official CO2 figure of the car, the more tax is due, which has the potential to wipe out any savings from the reduced taxable income.
Be clear on your objectives
That may sound simple but many organisations move straight into a provider selection process without understanding their own objectives. Your objectives should at least include:
• Maximise the choice of cars to improve take-up.
• Maximise the number of eligible employees to promote inclusiveness.
• Don’t undertake any “scheme risks” and minimise on-going scheme administration.
Set clear ground lines
There are plenty of statements to the effect that salary sacrifice is not a matter for tax, but one of employment law. Reinforced by our research, the reality is that early engagement of tax teams and the subsequent correct structuring is essential. Case law demonstrates the challenge of doing this wrong.
As a result, clear and concise implementation objectives need to be agreed at the inception of the project and a standard project plan for salary sacrifice can run to several hundred lines. Done right, detailed work on scheme modelling and design structure and the accompanying policy decisions, with no gaps and no ambiguity, will pay dividends.
In terms of the end result, all too often different stakeholders have differing views of a successful implementation; is success measured by quote and / or order levels, annual employee penetration levels across different populations, or by the initial budget plan versus the actual cost performance of the programme? Or all of the above? Clear and concise project tasks and objectives, core stakeholder analysis and involvement, adherence to key toll-gates, all predicated on a robust and compliant policy structure, will result in a successful implementation.
Understand the risks but don’t accept them
The biggest barriers you will encounter are known as “scheme risks”. Deal with these and the rest is simple. So what are “Scheme Risks”?
• Early Termination Risk – What happens if an employee leaves mid-lease? For some scheme designs, the lease will need to be terminated so you’ll try to recover the termination cost from the outgoing employee. This can be quite difficult.
• Consumer Credit – Is a car salary sacrifice scheme consumer credit? Just like bikes to work, car salary sacrifice IS consumer credit. But unlike bikes to work, the OFT hasn’t issued a group licence. Pretending car salary sacrifice isn’t consumer credit just isn’t a risk worth taking.
• Corporate Credit – Your company’s credit facilities are a valuable asset needed to run the business. Your finance team may not want to use them up on voluntary benefits.
With proper provider selection and scheme design, you don’t actually have to have any of these problems. The right provider won’t create any of these scheme risks.
Choose your supplier very carefully
Salary sacrifice is a specialist area requiring a supplier with considerable experience and a track record in proper implementation (minimising workload for your organisation), securing HMRC compliance, mitigating risk to your business, integrating with existing fleet arrangements and most importantly employee engagement. Don’t get caught up in conversations around Consumer Credit Licences – properly structured schemes do not need one – they are an unnecessary cost to your business.
Understand the risks, seek advice
It is advised that any company wishing to implement a salary sacrifice scheme seeks 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.
Further consideration must be given to the main operational process and pricing parameters required. These include payroll administration and reporting, motor insurance, the national minimum wage, earnings related benefits, staff turnover with early terminations and contingency funds. It is also important to remember the change in accountancy standards under consideration that propose leases are accounted for on the employer’s balance sheet.
THE IMPLEMENTATION ITSELF:
Design your scheme and choose the right provider
These two steps really go hand in hand because your provider and their solution will provide the majority of the scheme design. So what are the top four things to insist on from a provider’s solution? Simple;
• Early Termination Risk – make sure you don’t have ANY early termination risks to manage. Contingency funds and early termination insurances just don’t cut it. A good provider won’t create the problem in the first place.
• Consumer Credit – make sure your scheme is fully compliant with the Consumer Credit Act. Your provider should be able to do all this for you. If they try to convince you a car salary sacrifice scheme isn’t consumer credit, your legal team should be concerned.
• Corporate Credit Facilities – find a provider who can provide the scheme without using up your credit lines.
• Day-to-day administration – find a provider who will minimise your ongoing scheme administration. Ideally you shouldn’t have to provide staff lists and changes or manage ad hoc recharges such as fines and accident excesses.
The right provider should be able to provide the scheme without any set-up or ongoing fees.
Keep it simple
Why have some salary sacrifice schemes either failed to get off the ground or suffered from a disappointing take-up rate? In our opinion this usually results from over-engineering what should be a fairly straightforward and well-established proposition. We know that tens of thousands of employees are currently offered the choice of either a cash allowance or a company car. Effectively those who choose to take the car simply sacrifice the offer of cash (additional salary) for a more tax-efficient benefit (a company car); so where’s the problem?
In reality company cars will always be relatively expensive, carry risk and interest HMRC no matter how they are acquired. But as a significant proportion of the UK's very well-established company car market is made up of perk cars rewarding staff with a new, fully maintained company car is nothing new, and those of us lucky enough to have had company cars will never forget the excitement and pleasure a new car brings.
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Plan and implement as a staff benefit
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. The scheme will only work if it is attractive to the employee by providing enough incentive to change from their incumbent method of funding their private car.
It is a fine balance to price a salary sacrifice scheme effectively to ensure the employee gains a clear benefit whilst the employer also achieves a cost saving. Too much weight in favour of the employer and the employees will not see the full benefit and few will agree to join the scheme. Due to this it is always advisable to approach a scheme as an improvement to the employee’s benefit package and not as a savings opportunity for the employer. Design the scheme properly, however, and some employer savings should follow.
Do not enter a salary sacrifice scheme with the view that it will also reduce costs if it replaces the company’s traditional contract hire company car scheme, any savings associated with salary sacrifice do not apply here.
THE POST-IMPLEMENTATION WORK:
Presentation is everything
Most employees won’t have salary sacrificed a car before, so employee engagement is critical. Internet sites are a great tool but they are not everything. People like to talk to people! Your chosen provider should be able to provide an online calculator, employee helpline, staff presentations and personal consultations.
Communicate, communicate, communicate
Extensive research of the salary sacrifice market highlights that a lack of employee understanding is the biggest risk to any scheme.
More importantly, the HMRC stipulate that the employee must fully understand every aspect of what the employee’s obligations are and that these changes are reflected in their contract. Hence it is important when ensuring HMRC compliance that all scheme documentation clearly outlines all the employee’s obligations when participating in the scheme. This includes what happens in the event of changes to insurance, mileage variation, out-of-policy items, resignation or redundancy and periods of extended absence.
In the first instance general scheme communications should provide clear explanations of how the scheme works and how the employee would be affected within a salary sacrifice scheme. Employees should receive step-by-step clarity, such as before and after payslip views, and policy highlights and key obligations must be included in all pro-active communications.
Throughout the quotation process the employee should be reminded of the key components included within the salary sacrifice and what this means, as well of the overall costs related to their selected vehicle. During the life of the contract, timely communication should remind employees of their relevant obligations and, as the vehicle approaches the end of the originally agreed contract term, further targeted communications should clearly explaining the employee’s obligations upon return of the vehicle.
Allay employee suspicions
For an employee to understand how salary sacrifice works and where they will realise any financial benefit requires an appreciation of how their employment tax is calculated. It is all too common for employees to become suspicious at the slightest mention that their tax is being altered. Any negative suspicion will have a serious impact on the success of the scheme, therefore, it is vital to communicate the policy in a simple, open and effective manner using any medium or forum necessary.
Consider all possible marketing methods to maximise take-up
There is a strong correlation between the ability to market a scheme and its success. Those companies which have more open communication channels have the highest take-up. Work with your provider to create tailored marketing plans and ensure that you maximise your internal channels. Communications should cover both the launch of the scheme and ongoing marketing throughout its life. Sophisticated online systems should provide a retail style experience for drivers and full analysis for the employer on scheme performance.
There are a variety of methods that can be used and the right approach will vary. Digital communications are usually combined with other methods such as poster campaigns and roadshows at offices. You may be able to utilise employee newsletters and the intranet to ensure that employees are regularly reminded of the scheme and the latest offers available. There may be employees who do not have regular access to emails or a computer as part of their job and who will need to be reached by other methods. If an employee survey has been carried out, this will provide useful information to help market the scheme on launch in terms of types of cars to promote. Information on employee demographics and quoting patterns can assist in targeting the marketing to particular segments.