HMRC has announced its new system for Optional Remuneration Arrangements (OpRA) will tax salary sacrifice drivers on the total package of car benefits they receive – including insurance, maintenance, tyre and breakdown cover – starting from April 2019.

When OpRA was introduced less than a year ago, the fleet industry expected these aspects would not be taxed. However, HMRC now claims that their omission from the legislation was both an "oversight" and "mistake" not identified during the initial policy proposal consultation.

Industry bodies estimate that salary sacrifice drivers are likely to be affected by higher costs as a result, up to an additional £100-£240 per year in taxes. Employers will also be affected, required to pay more Class 1A National Insurance.

Members of the leasing industry are now lobbying the Government to introduce a transitional arrangement for those who agreed salary sacrifice deals under the previously proposed OpRA measures. This might take the form of a grandfathering arrangement (a temporary exemption from the new law) for those who took out deals from April 2017.

Policy director at the British Vehicle Rental and Leasing Association (BVRLA), said: “This change could see some employees, who entered into a new arrangement on or after April 2017 in good faith, being affected. This is why the BVRLA is calling for transitional arrangements to be put in place so that the planned changes only apply to new arrangements entered into on or after July 6, 2018 (when the changes were announced).”

Claire Evans – head of fleet consultancy at Zenith, collaborating with the BVRLA – added:  “It is our view that these employees based their decisions on the interpretation of the OpRA legislation written at that time and should be protected against unbudgeted for BIK tax increases.”

However, the Government does not appear to be backing down on the issue. “The Government does not believe that grandfathering is appropriate," a spokesperson said. "The changes intended simply ensure the rules work as intended."

Some industry providers are reporting that the majority of cars may not be impacted by the changes to the OpRA tax regime. Ultra-low emission vehicles (ULEVs) will also remain exempted after the industry fought for the benefit when it was first proposed.

Adrian Hulme, senior consultant for employer solutions at BHP, suggested that drivers will be unaffected where the benefit-in-kind (BIK) figure exceeds the sacrifice amount. However, he conceded some drivers will see their tax liabilities increase as a result of the change.

“From 2019/20, when you have to take into account the salary sacrificed for the ‘package’ element too, employees’ BIK tax bills will inevitably be larger," Hulme said. "This is because the benefit figure will in most circumstances become the total amount of salary sacrificed, which will be higher than the benefit figure calculated in the ordinary way.”

In support, SG Fleet reported that – in a worst-case scenario with no grandfathering arrangements in place – only 43% of it's 14,000-strong fleet would be affected. Out of those vehicles, over one third (36%) would see £10 to £20 added to their company car tax bill per month.

SG Fleet commercial director, Chris Salmon, emphasised that HMRC is engaging in further consultation on the OpRA changes. “We are actively engaged in this discussion process, because customers will potentially be left with a situation where they have multiple calculations under the previous rules, the new rules from April 2017, and this change again for April 2019," said Salmon.

“HMRC did introduce grandfathering before (the introduction of OpRA in April 2017) and we hope they will offer grandfathering again because we think it’s somewhat unfair to change the rules mid-cycle for customers.”

BHP's Hulme added: “Ultimately it will have an impact. The change is potentially making a car more expensive to obtain through salary sacrifice. The effect may just be on the choice of car. It could encourage employees to look at the ULEV market which is not affected by the OpRA tax rules.”

John Lawes, managing director of Hitachi Capital Vehicle Solutions, states his belief that the overall impact will be negligible.

“This shouldn’t be seen as an end to salary sacrifice, just a chance to refocus on the true value and convenience employers are providing to their workforce through the company car scheme,” Lawes said.

“A salary sacrifice vehicle is cheaper at the start of its life because companies can often buy them at a discount and pass that discount on to their employees.

“It is more convenient throughout its life, as extras such as road tax and breakdown cover are bundled in. And, by virtue of being a newer vehicle, its resale value is protected at the end of its life.

Fleet managers are advised to be upfront with customers and employees about ongoing developments to the policy. “Be flexible,” said Lawes. “The past few years have demonstrated that Government policy can change swiftly, so fleet policies should be able to react swiftly too."