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HMRC internal manual

Employment Income Manual

Optional remuneration arrangements: cars made available for private use

Sections 120A and 120B ITEPA 2003

From 6 April 2017, the Income Tax and NICs advantages where benefits are provided through arrangements in which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.

Transitional provisions apply for a limited period. For further details see EIM44030.

Certain benefits in kind are excluded from the changes. For further details see EIM44130.

Cars made available for private use with CO2 emissions of more than 75 grams per kilometre are within the scope of the optional remuneration arrangement rules. 

The relevant amount to treat as earnings from the employment is the greater of:

  • the modified cash equivalent of the benefit, and
  • the amount foregone in relation to the provision of the benefit

The modified cash equivalent in relation to the benefit of a car means the amount which would be the cash equivalent under the normal method but ignoring any capital contributions made by the employee (step 3 in EIM24350) and any payments the employee is required to make for private use.

Once the relevant amount has been determined, a deduction is then made for any capital contribution. This is given by multiplying any capital contribution (up to the maximum of £5,000) by the appropriate percentage. A deduction is then given for any private use contribution.

Example 1

An employee has a car made available to them in the tax year 2017 to 2018 under the terms of an optional remuneration arrangement under which they give up £300 salary per month. The employee also makes a capital contribution of £1,500 for a higher specification vehicle. The car has a list price of £20,000 and an appropriate percentage of 17% (based on CO2 emissions and adjusted where applicable e.g. diesel). The cash equivalent value of the vehicle would normally be £3,145 (£20,000 minus capital contribution £1,500 = £18,500 × 17%. The modified cash equivalent will, however, be £3,400 as no account is taken of the capital contribution.

The modified cash equivalent is then compared with the amount foregone. The amount foregone (£3,600) is greater than the modified cash equivalent (£3,400) so £3,600 is used to determine the relevant amount. The relevant amount to treat as earnings is £3,600 minus £255 (capital contribution of £1,500 × 17%) = £3,345.

Where the car is available for less than the full tax year, you should still allow a deduction for the full amount of the capital contribution multiplied by the appropriate percentage.

Where a number of separate benefits are provided to an employee in conjunction with optional remuneration arrangements, usually the employer and the employee are well aware of the value of the salary or cash given up for each respective benefit and the employer should be able to report the appropriate value. However, where the amount given up for each benefit is not separately identified the value should be apportioned on a just and reasonable basis taking into account the facts and circumstances, as long as the total equals the total of the amount foregone.

Where the amount forgone by the employee is in return for the provision of the car and also for the provision of connected benefits then an apportionment should be made on a just and reasonable basis between the amount relating to the car and the amount relating to those benefits (see EIM44095). 

Classic cars

Where a classic car is made available for an employee’s private use and under an optional remuneration arrangement, work out the modified cash equivalent value without reference to any capital contributions made by the employee. 

Trading up

Employees may be provided with a car partly through optional remuneration arrangements and partly through a personal contribution out of net pay. When determining the relevant amount, only account for the amount foregone under the optional remuneration arrangements.

Example 2

An employee has the option of a cash allowance of £5,000 which she gives up for a car with a modified cash equivalent of £3,000 and an appropriate percentage 17%. However, the employee wanted a higher specified model with leather seats costing a further £500. So, she made a payment of £500 to her employer out of her taxed pay. The amount foregone is £5,000 which is compared with the modified cash equivalent of £3,000. The relevant amount is £5,000. The payment of £500 is treated as a capital contribution. A relevant amount is reduced by £85 (17% × £500).