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• Common risks with salary sacrifice company cars are around early leavers, parental leave and long-term illness.
• Employers should also be aware that, when changing to a salary sacrifice scheme, it must be reflected on the employee’s contract.
• Make it clear to staff that they are responsible for any damage done to the vehicle and excess mileage charges.
• A salary sacrifice company car arrangement cannot be offered to an employee who risks falling below the minimum wage.
Offering company cars through a salary sacrifice arrangement has advantages for both employers and employees, but there are risks that must be mitigated, says Jennifer Paterson
A salary sacrifice scheme for company cars works much like one for other tax-efficient benefits, except staff are likely to sacrifice a significantly larger part of their pay. The fact that the employer is liable for the car means the risks associated with this benefit are significantly larger, too.
When an employer introduces a salary sacrifice car scheme, the first risks concern its documentation. As the employee is effectively agreeing to reduce their gross pay in return for a benefit, the employer may have to amend the terms of their contract.
Employers are not required to get the new contract approved by HM Revenue and Customs, but HMRC needs to confirm that it is a permanent change in terms and conditions, and that the salary sacrifice is reflected on employees’ payslips.
The documentation should also state whether the employer intends to make any extra deductions from an employee’s pay, such as for end-of-contract wear and tear.
David Hosking, managing director of fleet provider Tusker, says: “If an employee mistreats the car, the employer would be on the hook for that. But the employee would be on the hook for any excess mileage charge.”
Other risks can arise if an employee takes maternity or adoption leave, or more than two weeks’ paternity leave. For example, if an employee is on maternity leave, the employer must still provide the benefit, even if they are not receiving a salary to sacrifice. Hosking says: “If the employee is not on an enhanced maternity pay from their employer – and salary cannot be sacrificed from statutory maternity pay – the employer would have to pay the rental on that vehicle.”
Long-term illness and early termination
There are also risks associated with long-term illness and early termination. Roddy Graham, chairman of the Institute of Car Fleet Management and commercial director at Leasedrive Velo Group, says: “If staff do leave, the fleet provider would be looking to find a way to reallocate the car to someone else to minimise that risk to the employer.”
To mitigate these risks, employers could build in a charge to pass on to the employee. In effect, the employee is charged an insurance premium that covers the employer if they go on parental leave, resign or are absent due to long-term illness. Robert Kingdom, head of marketing and business development at Masterlease, says: “The policy should deal with issues like maternity or long-term sickness, but also allow the employer to recover cost if one of those potential risks happens.”
There is also a risk that some staff will not be able to take part in a salary sacrifice car scheme because it would reduce their take-home pay to below the national minimum wage. This may mean the employer is unable to offer the scheme to all staff. Hosking says: “The employer can choose to say it does not want anyone sacrificing more than 20% of their base salary with the caveat that no one can sacrifice below the minimum wage.”
Scheme providers can give employers information about employees’ driving activities, which can help them take action to guard against risks such as drivers racking up excess mileage.
Employers should seek a provider with extensive history in the market, says Kingdom. “Unless they have been through more than one cycle from an employee taking a car through to changing their car through to leavers, they are unlikely to be able to advise an employer fully on the risks.”
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