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Salary sacrifice on EV

Can salary sacrifice be used for a director that does not actually take a salary?

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I know this sounds odd, but bear with me. A director of the company does not take a salary (rather allowing value to build up in the company in anticipation of future dividends / exit), but is a higher rate tax payer becuase of other income.  In the meantime subscribing for an EV through a company / salary sacrifice seems to be incredibly good value.  It appears half the VAT can be claimed back by the company.  If the director then makes the company whole by reimbursing the net cost, that net cost would be deducted from a gross salary in calculating taxable salary thereby potentially meaning the actual cost of the car is 60% of what it would otherwise be subscribing as an individual (slightly less because of VAT saved as well).  There is a BIK charge of 2% (assuming car does not arrive until next tax year) which would also need to be paid.  Could the director effectively take a negative salary from the company in order to subscribe for the EV at a preferential rate and pay the company each month for the equivalent 'negative' salary (covering net cost of subcription for car after 50% VAT deduction and the value of the BIK)? I have ignored NI for the time being but presumably this would also need to be taken into account on BIK element?

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Replying to Tax Dragon:
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By The Dullard
04th Oct 2021 11:25

Personally, I preferred the FTT's version (where TE was negative with no DE), in Martin, rather than Judge Warren's (treating the repayment as DE), because it doesn't feel like it was "for the purposes of the employment".

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Replying to The Dullard:
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By Tax Dragon
04th Oct 2021 11:43

Fair comment. And the existence of (a) lends support to that thought.

Still doesn't help me understand why the legislation uses the word "exceptional" in (b) but not in (a), since every (a) must be a (b).

(It's an odd word to use legislatively anyway - unless there's another section somewhere that maybe lists out or describes what it considers "exceptional").

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Replying to Tax Dragon:
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By Tax Dragon
04th Oct 2021 11:43

(I get hung up on words, as you can tell. Part and parcel of being a pedant, perhaps.)

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Replying to Tax Dragon:
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By Tax Dragon
04th Oct 2021 11:46

Tax Dragon wrote:

every (a) must be a (b).

Renders (a) utterly and obviously otiose.

I must be missing something.

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Replying to The Dullard:
RLI
By lionofludesch
04th Oct 2021 12:53

The Dullard wrote:

WTAF?

No need for a salary sacrifice or any of your negative salary mumbo jumbo.

[chuckle]

Nevertheless, I'd be jolly interested to see how payroll software deals with a negative salary.

I would imagine not very well........

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By Hugo Fair
04th Oct 2021 13:21

Notwithstanding the (quite natural) interest in the concept of -ve earnings being shown by the experts in tax issues, OP seems to me to have a misunderstanding of the nature of a salary sacrifice at the 'other end' of the equation.

Sal sac is a means of reducing tax (and ER's NICs) 'in return' for provision of a BiK ... so in the case of a vehicle could only be contemplated either where the company (not the director/employee) has bought the car or has signed a lease contract for provision of the car.
The former would be insane IMHO, whereas the latter used to be reasonably common but decreasingly so since this type of BiK had it's taxation rules altered via OpRA.

This may all be irrelevant, as I'm having trouble reading between the lines of OP's scenario - but it seems to me to be confusing the roles of the director and of the company (and possibly not understanding the impact of OpRA).

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By nksimmons
04th Oct 2021 14:58

Thanks for all the feedback - who'd have thought that a forum for professionals could be so vicious - just like mainstream social media?!

Apologies for using an acronym that I assumed would be fairly common (EV=Electric Vehicle) in the context of a question about BIK (benefits in kind).

Not sure who or what'OP' is?

I am an accountant, but not a tax specialist and I have zero experience of company cars hence posting the "mumbo jumbo" question here.

The key point here is that this has to be salary sacrifice - the company is not in the position to suffer the bottom line impact of handing out "free" company cars. The rationale for entertaining this being the overall saving for an employee/director compared to the exact same vehicle leased privately. If I have understood correctly the financial incentive is very attractive.

Perhaps a worked example would help:

Cost as a private individual = £600 pm + £120 VAT = £720 pm

Cost to company = £600 pm + £60 VAT (50% recoverable) - £660 pm

Cost to employee (assuming 40% income tax and reimbursement of company cost via salary sacrifice) = £660 * 60% = £396 + £100 BIK (assuming £60k P11D value) = £496 pm

So the employee saves £224 / £720 = 31% (ignoring NI which should also result in a saving to company and employee).

Coming back to the concept of a 'negative' salary. As the director currently does not take a salary they would need to pay £496 pm to cover the 'net' cost of the car and make good on the BIK deductions. It sounds like there is complex case law on the subject - so thank you for those references I will go and read up (I was hoping there was amore straightforward answer). I guess if all else fails the director would need to start taking a salary that would be sufficient to cover the salary sacrifice and any tax / NI due when grossing everything back up?

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Replying to Justin Bryant:
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By nksimmons
04th Oct 2021 15:57

Thanks - that looks a little more complex. What I had in mind (other than the negative salary - but the director's loan situation has got me thinking!!) I think is far more vanilla and widely used. Dare I say even encouraged by HMRC (or at least their bosses) in order to accelerate the switch to EVs. Of course HMRC (and their bosses) can always change their minds as they have been know to do in the past having encouraged certain behaviour in exchange for tax relief.

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Replying to nksimmons:
Psycho
By Wilson Philips
04th Oct 2021 15:31

You need to factor in corporation tax as well as NI if you want an exact comparison but based on those numbers while the employee might be saving £224, the company is still out of pocket to the tune of £164. The net saving is therefore only £60 - in other words, effectively the VAT that the company is able to recover.

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Replying to Wilson Philips:
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By nksimmons
04th Oct 2021 15:40

Please can you elaborate on the corporation tax / £164? What did I miss? As noted I'm not a tax expert so I assumed that the cost of the lease would net off against the salary sacrifice thus no bottom line (or CT) impact? At least that was the position I was trying to get to (and the one generally advertised by people selling salary sacrifice / company car schemes).

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Replying to nksimmons:
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By nksimmons
04th Oct 2021 15:53

Sorry - my bad - I see the £164 now. £660 being the net of VAT cost to the company and £496 being the amount of cost to employee. I'm not sure the maths works quite that way? The company deducts £660 from the employee's gross salary to cover the costs (the salary sacrifice). If, for argument's sake, the gross salary before any deductions was £5000 pm the net salary after 40% tax would be £3000. Because the salary sacrifice gets deducted from the gross salary the gross salary is now £4340 which means the new net salary is £2604. So in exchange for a car costing the company £660 per month the employee has foregone £496 of net salary. That really is the whole point of pursuing this unless I've got completely the wrong end of the stick?!

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Replying to nksimmons:
Psycho
By Wilson Philips
04th Oct 2021 16:18

Your analysis would be correct if there was an actual salary in place. All things being equal, the company would be replacing an outlay of £x with an outlay of £X. x and X being the same but X not subject to income tax, hence the saving.

But here you're imagining a theoretical salary. The company currently has no outlay. So there is nothing to compare. It is going from an outlay of £0 to a net outlay of £164.

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Replying to Wilson Philips:
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By nksimmons
04th Oct 2021 16:24

Hence my original question! I suspect the only way for this to work is for the director to start taking a salary which would of course then have an impact on bottom line versus the status quo. Unless anyone has other ideas?

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Replying to nksimmons:
Psycho
By Wilson Philips
04th Oct 2021 16:42

That's not what I was saying. You are simply trying to draw a comparison that doesn't exist. There's no point in taking a salary purely for the purpose of creating such a comparison. If nothing else, the VAT saving should be enough to justify the company incurring the expense regardless of the extent of reimbursement.

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Replying to nksimmons:
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By lionofludesch
04th Oct 2021 16:42

nksimmons wrote:

Hence my original question! I suspect the only way for this to work is for the director to start taking a salary which would of course then have an impact on bottom line versus the status quo. Unless anyone has other ideas?

Take a salary so that he can sacrifice it?

Just asking but, if he wants an EV, why doesn't he just have one and take the BIK hit?

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Replying to lionofludesch:
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By nksimmons
04th Oct 2021 17:17

Although the director is a shareholder they are not the sole shareholder. This director has never taken a salary (as they do not work in the business on a day to day basis - hence the comment about the expectation of a dividend / exit). To start taking a salary or having the company pay for a car would impact other shareholders and require some sort of justification. If there was no impact (because of salary sacrifice) then the only person losing out would be HMRC. However, it sounds like that is not possible as the concept of a 'negative salary' doesn't seem to be getting much support from the experts on here (I'm not sure why taken in the round this should be such a crazy notion - the director does earn a salary from other directorships and pays income tax at 40% through PAYE - if someone has more than one job and is on two different payrolls I had assumed, perhaps wrongly, that the notice of coding would ensure that correct deductions are made in total, but a negative salary from one job offsetting a positive salary from another is clearly both unusual and in the 'too hard' box) . The next best thing would therefore be to pay as a low a salary as possible to enable the income tax benefit to kick in and salary sacrifice to work, but with the least possible impact on the bottom line. Hopefully that makes sense?

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Replying to nksimmons:
RLI
By lionofludesch
04th Oct 2021 17:28

nksimmons wrote:

Although the director is a shareholder they are not the sole shareholder. This director has never taken a salary (as they do not work in the business on a day to day basis - hence the comment about the expectation of a dividend / exit). To start taking a salary or having the company pay for a car would impact other shareholders and require some sort of justification. If there was no impact (because of salary sacrifice) then the only person losing out would be HMRC. However, it sounds like that is not possible as the concept of a 'negative salary' doesn't seem to be getting much support from the experts on here (I'm not sure why taken in the round this should be such a crazy notion - the director does earn a salary from other directorships and pays income tax at 40% through PAYE - if someone has more than one job and is on two different payrolls I had assumed, perhaps wrongly, that the notice of coding would ensure that correct deductions are made in total, but a negative salary from one job offsetting a positive salary from another is clearly both unusual and in the 'too hard' box) . The next best thing would therefore be to pay as a low a salary as possible to enable the income tax benefit to kick in and salary sacrifice to work, but with the least possible impact on the bottom line. Hopefully that makes sense?

Not to me, I'm afraid.

Give it a go and see what happens. I'd definitely be interested in the outcome.

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Replying to nksimmons:
Psycho
By Wilson Philips
04th Oct 2021 20:19

I just don’t understand why you are so fixated with a salary sacrifice. Let the company provide him with a car and, if he feels so inclined, let him reimburse the company to whatever extent they agree on.

It really is that simple.

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Replying to Hugo Fair:
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By nksimmons
04th Oct 2021 21:59

The goal is not to save the company money, but to save the director money by using a legitimate tax break. The goal is for the company not to have any financial impact at all (hence salary sacrifice). I am not sure why people are not getting that aspect?! The end result is that HMRC are subsidising the dog food because someone in government has decided they like dogs.

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Replying to nksimmons:
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By Tax Dragon
04th Oct 2021 22:03

@nksimmons (OP), as Wilson (and others) have said, stop using the term "salary sacrifice".

@Wilson - and maybe others - what you are possibly missing about the OP's plan is that s/he thinks the director gets tax relief for the payments to the company.

@OP, I have a client pays 40% tax on employment income. She has no dividends, but is a 100% shareholder and sole director of a dormant company. Suppose she starts paying the company £10,000 per year as negative salary. On your logic, that costs her £6,000 net (ignoring NIC), as she pays negative £4,000 in PAYE tax. Company (no longer dormant) gets negative tax relief on the salary - current cost £1,900. It pays the £8,100 balance out as a dividend. Shareholder pays c£2,000 in tax.

@OP, she put £6,000 (net) in and gets £6,100 (net) out. Magic.

@OP, any flaws with my plan? I've followed your maths, I think. (Obviously no VAT saving in my client's case, so it's not as good as your plan.)

@OP, I haven't included NIC because you haven't shown me how that would work. But surely it can only work in my client's favour?

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Replying to Tax Dragon:
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By nksimmons
05th Oct 2021 08:39

As stated - I am not a tax expert! Thanks for clarifying that OP is me (original poster - not sure - not a regular here). I was floating an idea. Based on the fact that HMRC does not differentiate when it comes to self-assessment return between one source of income and another (it all gets lumped together and taxed at the highest rate possible) and that any tax paid through PAYE or other deductions at source all gets lumped together and netted off, it did not seem an unreasonable concept to see if this might come in to play in the circumstances described. Clearly not it would seem. Thank you for the 'kind' input and I'll be sure to check if there is a way to work with you as an agent as you are all very knowledgeable - where do I sign up?

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Replying to nksimmons:
Psycho
By Wilson Philips
04th Oct 2021 22:23

At the moment the car is costing the company absolutely nothing. Because it isn’t providing a car. If the company spends a net £660 per month (ignoring CT etc) the only way that there is going to be no financial impact on the company is for the director to reimburse the full £660. Which is what I was alluding to (much) earlier.

For the (very) last time you can’t sacrifice something that you don’t have. And to suggest creating a salary just so that you can sacrifice it is just plain absurd.

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Replying to nksimmons:
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By Hugo Fair
04th Oct 2021 22:26

Just realised from perusing your historical posts that you're not an Agent - so are you the Director or an employee of the company? Either way, have you asked the company's accountants what they think the chances are of your plan succeeding?

As TD and WP say, Salary Sacrifice is a complete red herring here ... it is an agreement to a contractual *reduction* in salary (not a mere deduction), so if salary is zero it can't be reduced.
And any 'fake' salary that is then sacrificed will have necessitated first making the director an employee (which is presumably not the current case) ... giving her/him employment rights (paid holiday, sick pay, etc) about which, from what you say, the company would not be happy.

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Replying to Hugo Fair:
Psycho
By Wilson Philips
04th Oct 2021 23:05

Ah, the penny drops. I ought to have checked the credentials. All makes sense now, if you get my drift.

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Replying to nksimmons:
Psycho
By Wilson Philips
04th Oct 2021 15:54

I was simply looking at the very basic maths.

Company's outlay, after recovery of VAT, is £660.

Director reimburses company £496. So company's net outlay is £164.

Your problem is that you are talking about a salary sacrifice when there is no salary to sacrifice.

EDIT - posted while you were speaking :)

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Tallula Brogan
By Tallula Brogan
05th Oct 2021 10:24

Hi all, the comments on this thread are now closed. This sort of behaviour will not be tolerated on a professional forum. Please try to remain respectful towards each other in the future. Thank you.

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