23 March 2018

Employees to face demands in 2018/19 for unpaid tax as OpRA bites

Thousands of employees with a company car or cash allowance option are expected to face a demand for unpaid tax in 2018/19 as Optional Remuneration Arrangements (OpRA) begin to bite.

The new rules came into effect on April 6, 2017 and apply to car salary sacrifice schemes and car or cash allowance programmes. Essentially the new rules mean employees opting for a salary sacrifice arrangement or taking a company car in lieu of a cash alternative will pay tax on the “greater of” the existing company car benefit value and the salary sacrificed or cash allowance given up.

When the government published details of the new rules following the initial announcement in the 2016 Autumn Statement it said that car arrangements in place before April 6, 2017 would be protected until the earlier of April 2021 or “a variation, renewal, modification of the arrangements” was introduced. Additionally, ultra-low emission vehicles (ULEVs) - currently those with CO2 emissions of 75g/km or less - are exempt from the regulation.

However, due to the rapid introduction of the new rules, HM Revenue and Customs (HMRC) had no official mechanism in place for a higher salary sacrifice/cash allowance to be reported in 2017/18. Additionally, many company payroll departments were not set up to handle the impact of OpRA rules on tax. As a result, detailed information will not be reported until P11D submissions are made by employers in July.

Consequently, it is widely believed that in many cases only employees who entered into a company car arrangement for the first time or exited a scheme for the final time in 2017/18 will have had their tax arrangements correctly reconciled.

Therefore, many tax experts believe employees can expect to have their tax codes changed in August, following submission of their P11D, to take account of any unpaid tax under OpRA rules.

Employment tax expert Alastair Kendrick, of Ak Employment Tax Services, said: “Employees have, I believe, been left in the dark. It is a terrible piece of communication because many employees have been unaware of the “greater of” rule where they had a cash or car option. Many employees will have chosen a tax efficient car, but they will actually pay tax on the value of the higher optional cash allowance. They have been paying tax on a company car, but the wrong amount and will get a shock when they are told what the correct amount should be.

“As a result, when employees realise the impact of OpRA rules they have been asking for their contracts to be changed to remove the cash option, but they will potentially face a bill in 2018/19 for unpaid tax relating to 2017/18.”

He added: “Most employees will not have a contract of employment that is ring-fenced until 2021 so the exemption rules may not apply and protection against OpRA could be removed at that point. Contracts of employment are generally reviewed annually, so OpRA could bite and that is what many employers and employees have failed to appreciate.”

Furthermore, there is an anticipation that depending how HMRC interprets “a variation, renewal, modification of the arrangements” could result in employment lawyers contesting demands on employees for underpaid tax.

  • See HMRC 480 (2018) ‘Expenses and benefits: A tax guide’ here.