AS2016: salary sacrifice clampdown from April 2017

Chancellor Philip Hammond has confirmed plans to clamp down on the tax advantages of salary sacrifice and benefit in kind schemes, but there is to be an exemption provided for low emission vehicles which was not included as part of the original consultation proposals

In his Autumn Statement, Hammond said that the majority of employees were taxed on a cash salary, but that some who sacrificed part of the same salary for benefits in kind paid less tax, and the Treasury wanted to reduce the difference between the two.

There are esimates that millions of employees will be affected, although the measure is only estimated to raise £85m in additional tax revenue in 2017/18.

‘From April 2017 employers and employees who use such schemes will pay the same taxes,’ Hammond told MPs.

There was a consultation on the issue which looked at changing the income tax and National Insurance contributions (NICs) treatment of certain benefits in kind when provided through salary sacrifice arrangements, so that the taxable benefit is at least equal to the salary sacrificed,  which closed in mid-October.

At the time, this stated that ‘employer pension contributions, employer-provided pension advice, employer-supported childcare and provision of workplace nurseries and cycles and cyclist’s safety equipment provided under the cycle to work scheme will remain unaffected by this measure’.

However, HMRC has now confirmed that the new rules will also not apply to salary sacrifice for low emission cars, defined as those with CO2 emissions of up to 75g/km.

The measure will be effective for new arrangements from April 2017. Any arrangements already in effect at that date will not be subject to the charges until April 2018, while Hammond also announced a longer period of transition for cars, accommodation and school fees offered via benefit in kind arrangements, which will not be subject to the new measure until April 2021.

HMRC analysis suggests the clamp down will result in additional tax revenues of £85m in 2017-18, rising to £235m for the next three years and reaching £260m in 2021-22.

Colin Ben-Nathan, chair of CIOT’s employment taxes sub-committee, said: ‘We believe that the government’s proposals to increase the cost of benefits in kind (BIKs) provided under salary sacrifice and certain flexible benefit arrangements will cause significant practical difficulties for employers, and could result in unfairness for employees.

‘For example, it could be that the same BIK is provided to two employees working alongside each other but, because of how each negotiated their remuneration package, they are taxed differently on their BIKs. In other words, we will end up with precisely the uneven playing field that the government is concerned about.

The Treasury has also confirmed as announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 to ensure an employee who wants to ‘make good’, on a non-payrolled benefit in kind will have to make the payment to their employer by 6 July in the following tax year.

‘Making good’ is where the employee makes a payment in return for the benefit in kind they receive. This reduces its taxable value. This will have effect from April 2017.

Mark Groom, tax partner at Deloitte, said: ‘From April 2017 tax bills on many benefits in kind will increase, in some cases significantly.  The new rules will apply whenever a benefit is provided in conjunction with salary sacrifice. It will come as a surprise to many that the new rules will also apply in cases where an employer offers employees a choice between a benefit and a cash alternative, if the benefit is not wanted.

‘One of the reasons for the change was the perceived tax cost of salary sacrifice schemes; however the measures are only anticipated to raise £85m in 2017/18 and £235m per annum thereafter.’

Grandfathering 

Tax advisers welcomed the news that at least there will be a transitional period for this significant change to benefits in kind.

Iain McCluskey, PwC partner, said: 'The expected change in salary sacrifice rules will impact those employees who may look to take out benefits like health screening and mobile phone contracts through these schemes. For those who are already in these schemes, there looks to be some grandfathering of current tax treatment, but it is clear these changes will impact employee choice of benefits in the future.'

There were also doubts that the measures would create the desired fairness, outlined as a key desire on the part of the government when proposing this overhaul.

Ben-Nathan said: ‘We do welcome the transitional rules. Salary sacrifice and flexible benefit packages for many workers are negotiated on an annual basis and a change of tax treatment within that benefit period would have created unfairness and confusion.’

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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