Sarah Bradford looks at the new valuation rules for benefits provided under salary sacrifice arrangements and what this means for year-end reporting for 2017/18.
New valuation rules were introduced with effect from 6 April 2017 for benefits and expenses provided under a salary sacrifice or other optional remuneration arrangement. They also apply where a cash alternative is offered to the benefit.
The effect of the new rules is to deny the benefit of any associated exemption where a benefit is provided through an optional remuneration arrangement for all but a handful of benefits. The new rules will affect the value reported on the P11D for 2017/18; the form has been updated to reflect the new rules.
What is an optional remuneration arrangement?
The new valuation rules apply to benefits and expenses which are made available to employees under an optional remuneration arrangement. This is a `catch-all’ term which covers two types of arrangement.
The first type of arrangement caught is one where the employee gives up the right, or the future right, to receive an amount of earnings (such as salary) in return for a benefit. A salary sacrifice arrangement is an example of this type of optional remuneration arrangement. Under a salary sacrifice arrangement, an employee gives up cash salary in return for a non-cash benefit. Typically (but not always) the benefit taken in exchange for the reduction in salary is one that is exempt from both cash and National Insurance contributions (NIC). Historically, arrangements of this nature were popular as they allowed the employee to benefit from the tax and employee NIC savings and the employer to benefit from the employer NIC saving without the employer having to meet the cost of the benefit on top of the salary cost.
The second type of optional remuneration arrangement is one in which the employee agrees to be provided with a benefit rather than with an amount of earnings (e.g. a cash allowance). A popular example of this type of arrangement is one where an employee is offered the choice between a company car and a cash alternative.
New valuation rules
Prior to 6 April 2017, in the main where a benefit was made available under an optional remuneration arrangement, the cash equivalent of the benefit was calculated under normal rules by reference to what the employee actually had.
For example, if an employee entered into a salary sacrifice arrangement under which the employee gave up salary in return for a benefit that was exempt from tax and NIC the exemption applied, and the cash equivalent of the benefit was nil. Likewise, if the employee was given the choice between a company car and a cash alternative, and the employee opted for the car, the employee was taxed on the cash equivalent of the car computed in accordance with the company car rules. In some cases, the benefit of the exemption was lost where provision was made under a salary sacrifice or optional remuneration arrangement. Exemptions lost in this way included the exemption for paid and reimbursed expenses, the exemption for workplace meals and the exemption for trivial benefits.
However, this all changed from 6 April 2017. From that date, new valuation rules apply such that where a benefit is made available under an optional remuneration arrangement, unless the benefit is one of a limited range of protected benefits, the value of the benefit for tax purposes is the higher of the salary foregone or cash alternative offered, and the cash equivalent of the benefit calculated in accordance with normal rules. Consequently, where a benefit would normally be exempt from tax, if provision is made under an optional remuneration arrangement, the taxable value of that benefit is the salary foregone or cash alternative offered, as the cash equivalent value of an exempt benefit will be nil. This means that the exemption is lost where provision is made in this way and the employee is taxed on at least the value of his or her remuneration package before entering into the arrangement.
The new valuation rules do not apply to a limited range of benefits, and as such the value of any exemption is preserved.
The protected benefits are:
- pension savings;
- employer-provided pension advice;
- childcare and childcare vouchers;
- cycles and cyclists’ safety equipment under cycle to work schemes; and
- ultra-low emission cars (CO2 emissions of 75g/km or less).
Consequently, the exemptions for pension provision and advice, childcare and childcare vouchers and cycles cyclists’ safety equipment remain available where provision is via a salary sacrifice or other optional remuneration arrangement, as long as the condition attaching to the exemption are met.
Where a car is a low emission car, the company car tax rules apply to value the benefit regardless of the salary foregone or cash alternative offered.
Transitional rules also apply to delay the start date for the new valuation rules where an arrangement was in existence at 6 April 2017.
Where this is the case, the start date is the earlier of the date on which the contract ends, is modified or renewed and 6 April 2021 where the benefit taken in exchange is a car (other than an ultra-low emissions car), living accommodation or school fees; and 6 April 2018 in all other cases.
Practical application of the new rules
The following examples illustrate how the new rules work in practice.
Example 1: Salary sacrifice for mobile phone
Jack enters into a salary sacrifice arrangement in 2017/18 under which he gives up £25 a month in return for a mobile phone, which is available for personal use.
If the phone had not been provided under a salary sacrifice arrangement, its provision would be exempt from tax and NIC. However, the new valuation rules apply, and the benefit is valued at the higher of:
- cash foregone: £300 (i.e. 12 x £25); and
- cash equivalent value under normal rules: nil (benefit would be exempt).
The valuation rules mean that the exemption is lost, and the benefit is valued at £300 for tax purposes.
If the arrangement had been in existence on 6 April 2017, the new rules would not apply until 2018/19, unless the arrangement ended or was modified before that date.
Example 2: Salary sacrifice for childcare vouchers
Matthew is a higher rate taxpayer. On 6 April 2017 he enters into a salary sacrifice arrangement, under which he gives up £28 per week in exchange for childcare vouchers.
The childcare vouchers are a protected benefit and the new valuation rules apply. Matthew is not taxed on the provision of the childcare vouchers, as they remain exempt.
Example 3: Company car or cash alternative
Natasha and Nicola both work for the same company and for 2017/18 are offered the choice of a company car with a value of £30,000 or a cash alternative of £8,000 a year.
Both choose the car. Natasha chooses a car with CO2 emission of 65g/km and Nicola chooses a car with CO2 emissions of 100g/km.
Under the company car tax rules, the cash equivalent of Natasha’s car for 2017/18 would be £4,800 (16% of £30,000) and Nicola’s would be £5,700 (19% of £30,000).).
The alternative valuation rules do not apply to Natasha as she has chosen an ultra-low emission car. Therefore, she is taxed on the usual cash equivalent value of £3,900.
However, as Nicola has not chosen an ultra-low emission car, the new valuation rules apply and she is taxed by reference to the cash alternative offered of £8,000, as this is more than the cash equivalent under the company car tax rules (£5,700).
Reporting the benefit
When reporting the benefit on form P11D for 2017/18, the value reported should be that under the new valuation rules, unless the benefit is a protected benefit, or the transitional rules apply. The wording on the P11D has been updated to reflect the new rules; boxes now ask for the cost/market value or amount foregone.
Where the benefit has been payrolled for 2017/18, the payroll value must be computed in accordance with the new valuation rules, as appropriate.
To preserve any tax exemption, the benefit should be made available in addition to salary and without the choice of a cash alternative.
This article was first printed in Business Tax Insider in April 2018.