Salary sacrifice car schemes are a shrewd way of getting tax breaks while offering a perk to attract new talent; but are they all they are cracked up to be, or will they end up driving you mad? Verity Gough looks at the pros and cons.

Not only do salary sacrifice programmes offer employees the chance to purchase a car through the firm, but NI contributions and income tax payments that would have been payable on the original salary are less. It seems to be a win-win situation, so why isn’t everybody doing it?

According to the Employee Benefits/SureFleet Fleet research 2008, a paltry 1% of respondents have offered the car ownership or ‘affinity’ schemes to staff, with the figures blamed on a lack of attractive car discount rates coupled with poor take-up by staff.

Paul Brown, senior consultant, flexible benefits team at international business consultancy Watson Wyatt, believes one of the reasons the schemes are still not commonplace is down to the fact that any potential downsides will be shouldered by the company.

“Additional company cars can increase the overall risk and cost of running a fleet,” he explains. “These additional costs are associated with insurance, accident management, managing the fleet or vendor relationship if a lease company is used to provide the cars.”

However, he adds there are ways to ensure you are covered in the event of such things. “The risk of having ‘spare’ cars when an employee leaves during the lease period can be mitigated by providing shorter leases, say 12 months, than traditional fleet contracts and by including financial penalties for the employee who chooses to leave during the lease,” he says.

Likewise, set up costs can be prohibitive for companies so Brown advises a detailed financial modelling be carried out to prove the business case. This would need to involve HR and finance as it impacts on company taxation, VAT, PAYE and HR processes. “It is prudent for the company to then seek approval for the scheme from HMRC,” he adds. “The company’s tax advisors would normally be able to assist in this process.”

His comments are echoed by Roddy Graham, chairman of the Institute of Car Fleet Management (ICFM) and commercial director of vehicle management company Leasedrive Velo. “Salary sacrifice as a concept is not terribly new,” he says. “It’s just reasonably clever tax planning on the part of companies and organisations.”

He claims since the recent changes to the benefit-in-kind taxation schemes, which are now linked more to the price of the car and CO2 emissions, it is becoming more appealing to introduce these ‘perks’.

But he also stresses that getting the right tax advice is key to the scheme’s success. “When you are dealing with people’s salaries and the HMRC, it’s naive to think that you shouldn’t be getting the proper professional tax advice to do that,” he adds. “That will sometimes scare some companies away, who may think it’s too complicated.”

The hassle-free option

Issues such as increased administration, particularly if a company already operates a number of salary sacrifice schemes, introduces additional complexity for organisations.

Brown advises the department implementing any affinity scheme to ask questions and consider all possible scenarios before any paperwork is signed. For example, what happens when an employee begins maternity or paternity leave? How is the car affected by unpaid leave? If an employee participates in a number of salary-sacrifice schemes, do they still earn at least the national minimum wage?

Those who feel such schemes are too much hassle may want to consider using one of the emerging companies that claims to take the stress out of the process. Colleague Cars, set up by chartered tax advisor Gerard Gornall, who has worked in fleet management for the past 10 years, is one such firm offering organisations a salary sacrifice car ownership package.

“Traditionally, firms find that company cars, while valued by employees, are a hassle,” he says. “The opportunity to offer companies a salary sacrifice car affinity scheme has been there since the tax changes came in 2002 but nobody really grasped the concept in terms of a product that the employer will feel comfortable with.”

He believes if companies were better informed of the benefits of a fleet scheme, they would be more inclined to consider it. “It’s not like childcare vouchers, which most employees are familiar with and know the tax relief benefits. They might know that company cars get taxed but what they don’t know is that if it’s the right car, the tax payable is very low, which means you can get significant benefits to deliver to employees.”

However, there are risks. “If employers experience a downturn and need to get rid of people, it obviously comes at a cost as the cars are ultimately contracted to them,” Gornall explains. “This is the biggest risk but if they budget for it and plan, there is no reason there should be any surprises in the scheme.”

To this end, Colleague Cars operates a monthly management report for on-scheme performance, which contains information such as the number of people that have got quotes on the online system, how many orders are progressing, the payroll, and how much has been collected by salary sacrifice compared to how much is being paid out for the cars.

Being seen to be green

Graham believes that as companies’ green credentials become increasingly important, such salary sacrifice schemes will be par for the course. “Our clients, who tend to be large blue-chip companies, are constantly looking at their carbon footprint and costs,” he says. “They all agree there is great value in embracing car schemes where you can reduce your footprint, still give your employees choice and save money in the process.”

With so many obvious benefits, it seems it is only a matter of time before more companies take up the car affinity option. For now, Brown says there is already evidence of satisfaction for employees who have embraced such a scheme. “These employees are more engaged with the business and that generally means they are more motivated to do their job,” he adds.