EIM44070 - Optional remuneration arrangements: cars made available for private use

Sections 120A and 120B ITEPA 2003

From 6 April 2017, the Income Tax and NICs advantages where benefits are provided through arrangements in which the employee gives up the right to an amount of earnings in return for a benefit are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.

Transitional provisions apply for a limited period. For more details, see EIM44030.

Certain benefits in kind are excluded from the changes. For more details, see EIM44130.

Cars made available for private use with CO2 emissions of more than 75 grams per kilometre are within the scope of the optional remuneration arrangement rules.

The relevant amount to treat as earnings from the employment is the greater of:

• the modified cash equivalent of the benefit, and
• the amount foregone in relation to the provision of the benefit

The modified cash equivalent in relation to the benefit of a car means the amount which would be the cash equivalent under the normal method but ignoring any capital contributions made by the employee (step 3 in EIM24350) and any payments the employee is required to make for private use.

Once the relevant amount has been determined, a deduction is then made for any capital contribution. For tax years 2017 to 2018 and 2018 to 2019, this is given by multiplying any capital contribution (up to the maximum of £5,000) by the appropriate percentage. From tax year 2019 to 2020 onwards, there’s an additional step. After multiplying the capital contribution (up to a maximum of £5,000) by the appropriate percentage, the result should be multiplied by the ‘availability factor’. This is found by taking the number of days in the tax year, subtracting the number of days in that year that the car was unavailable, and dividing the answer by the number of days in the tax year.

The result is the amount of the capital contribution allowed in the tax year (this step will only be needed where the car is available for less than the full tax year). A deduction is then given for any private use contribution.

See examples 1 and 1A at EIM44071.

Classic cars

Where a classic car is made available for an employee’s private use and under an optional remuneration arrangement, work out the modified cash equivalent value without reference to any capital contributions made by the employee.

Trading up

Employees may be provided with a car partly through optional remuneration arrangements and partly through a personal contribution out of net pay. When determining the relevant amount, only account for the amount foregone under the optional remuneration arrangements.

Connected benefits

Where a number of separate benefits are provided to an employee in conjunction with optional remuneration arrangements, usually the employer and the employee are well aware of the value of the salary or cash given up for each respective benefit and the employer should be able to report the appropriate value.

Where, however, the amount given up for each benefit is not separately identified the value should be apportioned on a just and reasonable basis taking into account the facts and circumstances, as long as the total equals the total of the amount foregone.

Where the amount forgone by the employee is in return for the provision of the car and also for the provision of connected benefits then for tax years 2017 to 2018 and 2018 to 2019, an apportionment should be made on a just and reasonable basis between the amount relating to the car and the amount relating to those benefits (see EIM44105).

For tax years 2019 to 2020 onwards, the total amount foregone (including for connected benefits) should be compared to the modified cash equivalent of the car to establish the relevant amount to treat as earnings (see EIM44105).

See example 2 at EIM44071.

Note that any reimbursements to employees for connected costs which are not provided in conjunction with optional remuneration arrangements (e.g. an emergency repair which is not covered by existing contractual arrangements) will still fall within the scope of the exemption at s239 ITEPA 2003.