9 November 2018
Government clarifies OpRA rules to end 'connected costs' anomaly
Almost two years after the government first announced tax changes to car salary sacrifice schemes and car or cash allowance programmes the government has clarified 'connected cost' rules in the newly published Finance Bill.
Supporting documents to the draft 2018/19 Finance Bill, which has been published following last month's Budget Statement, make clear that "when a taxable car or van is provided through Optional Remuneration Arrangements (OpRA), the amount foregone includes costs connected with the car or van which are regarded as part of the benefit-in-kind under normal rules".
The 'explanatory note' highlights vehicle insurance as an example, but it also includes the costs associated with the provision of vehicle breakdown and recovery, service and maintenance and tyres and all other related "connected costs" that keep a vehicle on the road, with the exception of fuel.
Initially, legislation suggested that such 'costs' were excluded under OpRA rules. However, fleet industry discussions with HM Revenue and Customs (HMRC) to seek clarification on OpRA, which came into effect on April 6, 2017, highlighted what officials called "anomalies".
The 'explanatory note' says that when the OpRA legislation was originally introduced "an oversight meant that no provision was made to ensure the calculation of the amount foregone for a taxable car or van should be the total amount foregone, including any connected costs". The amendments are effective from the start of the 2019/20 tax year onwards.
Explaining the legislative clarification, the 'explanatory note' continued: "This provides that the total amount foregone, which is to be taken into account in calculating the amount reportable for tax and NICs purposes, includes both the amount foregone with respect to being provided with the car and the amount foregone with respect to the costs connected with the car (such as insurance), which are regarded as part of the benefit in kind under normal rules. The cost of a driver and fuel are not to be included as these are chargeable under separate provisions."
Industry estimates have suggested that for those drivers affected, it could cost them an additional £100-240 in tax per year. Employers will also pay additional Class 1A National Insurance.
The 2018/19 Finance Bill also makes clear that where a taxable car is provided through OpRA for only part of a year a pro-rata deduction applies to the value of the capital contribution just as is normal under company car benefit-in-kind tax charge rules. Again that provision was not included in previous legislation meaning that where a taxable car is provided through OpRA, the amount deductible for capital contributions is overstated where a car is available only for a part year.
OpRA was designed to mean employees opting for a salary sacrifice arrangement or taking a company car in lieu of a cash alternative paid tax on the higher of the existing company car benefit value and the salary sacrificed or cash allowance given up. However, car arrangements in place before April 6, 2017 are protected until April 2021 and ultra-low emission vehicles (ULEVs) - currently those with CO2 emissions of 75g/km or less - are exempt from the regulation.