This question is becoming more common as electric cars become more affordable, accessible and their use more widespread in society. With that, employers are looking for new ways to introduce these types of cars into their company car fleet on account of reducing their carbon footprint and fuel costs. One option is leasing electric cars in combination with agreed salary sacrifice arrangements between employers and their employee’s.
The principle of a lease car by way of a salary sacrifice arrangement is where an employer contracts with a lease car company for a car, generally of the employee’s choosing, which they provide to employees under a salary sacrifice arrangement. The cost of the lease is offset against the saving the employer makes by reducing their staff pay-bill.
Normally under optional remuneration rules, this type of arrangement would oblige the employer to consider the salary foregone versus the cash equivalent of the benefit being provided when computing the benefit to be reported on form P11(d), for a company car this would be calculated under section 121A ITEPA 2003.
However, if an electric car is being provided, the usual rules of OPRA do not apply by virtue of section 120A ITEPA 2003. Section 120A was enacted into legislation through Schedule 2 of the Finance Act 2017. This part of the legislation effectively disapplies the OPRA rules where a car is a low emission vehicle. A low emission car is defined as one with CO2 emission of 75g/km or less. The effect of section 120A means the employer is only obliged to calculate the cash equivalent of the company car benefit by using the standard rule (which HMRC term the method statement) under section 121 ITEPA 2003. Simply put, this is the list price multiplied by the appropriate percentage for the cars CO2 emissions – currently 2% for tax year 2022/23 (other steps under the method statement may apply).
The subsequent benefit to the employer is the reduction in employer class 1 NIC due through payroll on account of the salary sacrifice compared with the amount of Class 1A the employer will have to pay for the provision of a company car. The employee will also enjoy the use of a company car whilst saving on employee class 1 NIC as well as tax via the salary sacrifice. The employee will only pay tax on the reportable cash equivalent of the vehicle per section 121 ITEPA 2003 likewise, the employer class 1A will be assessed against the same cash equivalent. HMRC provides a good illustrative example of how section 120A and salary sacrifice work in practice in EIM44060.