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This publication is available at https://www.gov.uk/government/publications/changes-to-optional-remuneration-arrangements-rules-for-taxable-cars-and-vans/changes-to-optional-remuneration-arrangements-rules-for-taxable-cars-and-vans
Who is likely to be affected
Connected costs – employees provided with taxable cars and vans that is subject to the car or van benefit charge respectively and their employers.
Capital contributions – employees making a capital contribution towards a taxable car and their employers.
General description of the measure
This measure addresses two anomalies in the Optional Remuneration Arrangements (OpRA) rules, by introducing legislation to:
ensure that when a taxable car or van is provided through OpRA, the amount foregone, which is taken into account in working out the amount reportable for tax and National Insurance contributions purposes, includes costs connected with the car or van (such as insurance) which are regarded as part of the benefit in kind under normal rules
adjust the value of any capital contribution towards a taxable car when the car is made available for only part of the tax year.
The proposed legislation will ensure that the OpRA rules work as intended.
It ensures that the value of the amount foregone includes any amounts given up in respect of connected costs. Under the provisions of the current OpRA legislation, the value of any connected costs is not included when calculating the value of the amount foregone for a taxable car or van.
It also aligns the approach with the car benefit charge which makes provision to adjust the level of a capital contribution if the car is made available for only part of the tax year.
Background to the measure
Where the provision of a car or van available for private use is made through OpRA, the amount foregone is compared to the modified cash equivalent of the car or van benefit charge. The greater value is reportable for tax purposes.
When the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) was originally introduced, the explanatory note was explicit that connected costs were regarded as part of the car benefit charge and also applies to the van benefit charge.
During the introduction of section 7 and schedule 2 to the Finance Act 2017, an oversight meant that no provision was made to ensure the calculation of the amount foregone for a taxable car or van should also include any connected costs.
This meant the value of connected costs were not included in the calculation of the amount foregone, whereas they were deemed to be included within the modified cash equivalent rules, so that the comparison was not on a like for like basis.
Under the normal rules for calculating the car benefit charge, capital contributions are automatically subject to pro-rata if the car is made available for only part of a tax year. Similar provisions were not included in section 7 and Schedule 2 to the Finance Act 2017 for calculating the relevant amount. This means that currently, the amount deductible for capital contributions where the car is available only for a part year is overstated.
Extensive consultation on the policy proposals followed the announcement at Budget 2016 that the government was considering the range of benefits attracting income tax and National Insurance contributions advantages when offered through salary sacrifice.
Introduction of the OpRA legislation was announced at Autumn Statement 2016 and Finance Bill legislation was published in December 2016 for technical consultation.
Neither of the issues subject to amendment in Finance Bill 2018-19 was identified in response to the technical consultation.
Following introduction of the new rules in Finance Act 2017, HM Treasury and HMRC were made aware of these anomalies and the decision was made to restore the intended legislative position. This is the first opportunity that the government has had to make the amendments required.
Draft legislation was published for consultation on 6 July 2018.
The measure will have effect from 6 April 2019.
The current provisions for calculating the amount foregone and the treatment of capital contributions where an employee is provided with a taxable car or van are contained in Chapters 2 and 6 of Part 3 ITEPA.
Legislation will be introduced in Finance Bill 2018-19 to make changes to Chapter 6 of Part 3 of ITEPA (sections 120A, 121A, 132A and 154A) and Chapter 3 of Part 4 of ITEPA (section 239), to amend the method for calculating the amount foregone and the treatment of capital contributions.
The amount foregone will include both the amounts foregone in respect of the provision of the taxable car or van and any costs connected to that car or van.
The deduction for capital contributions will be reduced when a car is made available for only part of a tax year.
No changes are required to National Insurance contributions legislation.
Summary of impacts
Exchequer impact (£m)
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This change is not expected to have any significant economic impacts.
Impact on individuals, households and families
This change is expected to affect a small number of the one million or so individuals who are provided with a company car or van. This is because marketing of separate arrangements for connected costs is at an early stage and few employees make large capital contributions.
These individuals will now pay the amount of tax and National Insurance contributions which Parliament intended would be due under OpRA that based on the greater of the modified cash equivalent of the Benefit in Kind and the amount foregone.
The measure is not expected to impact on family formation, stability or breakdown.
This change will impact those sharing protected characteristics which are representative of company car and van drivers. They are more likely to be male than female and in working age groups.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses and civil society organisations.
This measure has no impact on most businesses, it will only affect those businesses who are not paying the correct amount of employer National Insurance contributions because they are using separate arrangements for connected costs or who have not adjusted the treatment of capital contributions to reflect part years.
Operational impact (£m) (HMRC or other)
Negligible – changes to guidance will be required. HMRC expects to publish draft guidance for consultation at Budget 2018.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
If you have any questions about this change, please contact the Employment Income Team by email: firstname.lastname@example.org