Salary Sacrifice and Achieving Net Zero

The pursuit of emission reductions demands both the business and private sectors to see all of their activities through the lens of carbon net zero targets. Prompted by the rise in EVs and other forms of low carbon transport, employers are increasingly reviewing their arrangements around salary sacrifice, cycle to work schemes and other employee focused initiatives in their attempt to reduce their carbon footprint.

While there are tax incentives for implementing these arrangements, there are also many tax pitfalls that need to be carefully navigated before the arrangements become operational.

For instance, the rules around VAT and the provision of cars under salary sacrifice schemes are complex and have been the focus of litigation by HMRC previously. Also, the VAT accounting applicable to cars provided to employees partly for private use, is significantly different from that applying to cycle to work schemes even though they may share a similar emission reduction objective.

So, there is no ‘one size fits all’ when it comes to the VAT implications of such schemes.

Furthermore, there are still some unresolved concerns about the level of VAT that an employer can reclaim on the cost of home charging company EVs. HMRC’s initial guidance would lead to employers reclaiming less VAT for topping up EVs than for filling company cars with fuel. But expect HMRC to provide more clarity (and more equality of treatment) soon, but in the meantime, any employer planning to make significant changes to their vehicle fleet should take this into account.

The route to net zero will require all organisations to review their operations, re-evaluate their investments and capital spend, and consider new, sometimes radical, practices. All of these have potential consequences for liabilities in VAT, environmental tax and other duties. The UK’s tax regime doesn’t always incentivise or support net zero plans so it remains critically important to understand the tax pitfalls before implementation.

If your are considering changes to salary sacrifice schemes or introducing a scheme for the first time and would like support regarding the indirect tax implications of doing so, please get in touch with your usual Centurion VAT contact or contact the team as a whole using emailus@centurionvat.com.

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