Ex-minister warns of salary sacrifice rule change

A former pensions minister claims the Government could target salary sacrifice in an effort to claw back lost tax revenues.

Millions of employees choose to sacrifice part of their gross salary in exchange for a wide range of services and goods, including pensions, childcare vouchers, bikes and cars.

However, Steve Webb has warned that the Conservative Government may be tempted to look at recouping some of the £15 billion avoided in national insurance contributions (NIC) in its first budget.

Chancellor George Osborne will reveal the Government’s tax and spending plans in his budget on July 8, but has already ruled out increases to income tax, NIC or VAT.

“One thing you might do is say ‘salary sacrifice costs us NIC revenues, so we’re going to do something’,” said Webb.

The former Liberal Democrat MP, who lost his seat at the last election, told Workplace Savings and Benefits that the benefit will be on the Government’s radar.

“If the squirrels at the Treasury are not eagerly working on that subject I would be very surprised,” he added.

However, the UK’s biggest provider of salary sacrifice for cars doesn’t believe the Government will change the rules.

“What he’s talking about is salary sacrifice,” said Tusker CEO, David Hosking. “Salary sacrifice is very different from the car version and the reason it’s very different is if you sacrifice your salary for childcare or bikes you don’t get taxed on the benefit you receive, whereas if you salary sacrifice on cars it’s no different to a company car where you pay benefit-in-kind tax.”

A report from PricewaterhouseCoopers (PwC), commissioned by Tusker, argues that car schemes provide a net financial benefit to HM Treasury.

PwC found that the net cash benefit to HM Treasury would be delivered as a result of irrecoverable VAT on the finance element of the lease rental, an element of insurance premium tax (a salary sacrifice car would have comprehensive cover rather than cheaper third party fire and theft cover) and the VAT due on the disposal of vehicles by the provider.

A further direct net tax benefit is that reductions in tax and NIC are offset by increases in other taxes, notably vehicle first registration fees, fuel duty and insurance premium tax.

Mark Sinclair, chief operations officer at Tusker, said: “Schemes are based on a robust model as well as driving value for employers and employees, and they are positive for HM Treasury and not tax negative.”

Tusker has also been in talks with its local MP, David Gauke, who is the financial secretary to the Treasury –effectively George Osborne’s number two. Hosking said Gauke had seen the PwC report, adding: “He’s on-board with what we’re doing.”

However, there are concerns that cars could be swept up in any decision on salary sacrifice, regardless of the different treatment for BIK.

“There are concerns in some quarters of HMRC that the use of salary sacrifice is tax avoidance and should be stopped on this basis,” Alastair Kendrick, tax director at MacIntyre Hudson, told Fleet News. “It is also the case that, in the Government’s view, it creates a tax advantage which is not generally available and creates a loss of NIC.

“It also adds to complexity, creating the need for more P11d returns to be prepared and the added workload for HMRC in processing – a point raised by the Office of Tax Simplification in their recent review of expenses and benefits.”

Salary sacrifice previously came to the Government’s attention when it created a shortfall in NHS pensions. “Those taking salary sacrifice paid a lower contribution because their pensionable earnings decreased,” explained Kendrick.

“However, if they were in a final salary pension arrangement they would still enjoy the same pension meaning more funding from HM Treasury to meet pensions. This issue stopped with the closure of the final salary scheme, but may have highlighted to Government the scale of the issue.”

Report from Fleet News.