An electric company car scheme can be a great way for employers to demonstrate their ethical and environmental values, whilst enhancing their employee value proposition. In particular, salary sacrifice schemes for electric cars are an attractive option due to the tax and National Insurance Contribution (NIC) savings they offer employers and participating employees. 

The savings can be significant, but it is important for organisations to design an arrangement with all potential costs and risks considered to prevent costly surprises later down the road. In this article, we, therefore, highlight some of the key issues that should be addressed as part of the design of a new company car scheme. Our earlier article, which discussed strategic considerations when thinking about ‘greening’ your car fleet, is available here.

Doing your supplier due diligence

Choosing the right supplier for your scheme is key to its success. Employers should consider not only a supplier’s reputation and experience, but also their ability to deliver on the scheme requirements.

It is also important to be aware of the remit of your chosen supplier’s advice. For example, a key requirement of your scheme may be to deliver tax and NIC savings to employees and the business by implementing a salary sacrifice arrangement.  Salary sacrifice has several tax and legal implications which you will need to carefully manage and communication to employees and its important to be aware to what, if any, extent your supplier can assist with these aspects.

Last year, KPMG were asked to advise a business on how they could manage disgruntled employees who had unexpectedly high company car benefit-in-kind values reported on their Forms P11D. Due to the long lead times on electric vehicles from the business’s chosen fleet provider, they had accepted petrol and diesel hire cars as an interim solution, without notifying employees that the tax charge on these would be higher than for the electric cars they had selected. The business had also failed to consider their own increased NIC liability. This emphasizes the importance of seeking appropriate tax advice and not relying only on the information provided by the fleet provider.

Designing your scheme

Throughout the design stage, there will be a number of decisions which will shape how the new scheme will operate, who will be able to access it and other associated considerations. We list a few of the key questions below. 

Who will be allowed to participate?

Defining your eligibility criteria and clearly communicating it to employees helps manage expectations and avoids having to decline employee requests.  For example, if you are using salary sacrifice arrangements, you will need to consider the National Minimum Wage implications and ensure that the scheme does not create any inadvertent breaches.  This should include understanding your worker type and the impact of all reductions and deductions from pay including areas such as excess mileage/unfair wear and tear etc. 

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What will your policy be for employees on statutory leave?

Failing to consider how to manage participating employees who take statutory leave (e.g. parental or sick leave) can result in the business being left out of pocket when this arises. 

How to deal with leavers?

Leavers may generate an early termination charge on the return of the car, so it is important to have a strategy in place to deal with this.  

Does the accounting treatment have any implications for the business?

As your new car fleet could impact the company’s balance sheet, the expected accounting treatment should be discussed with the finance function prior to implementation of your new scheme. In our experience, this can sometimes be overlooked.

What does it mean for existing company car drivers?

Your existing company car drivers, either business or elective, will have a different cost base and tax/NIC charge.  The impact of this and how to communicate it needs to be carefully considered as part of the scheme design.

How will you manage energy costs for employees?

In addition to the above, an important decision for businesses to make is the rate at which business mileage will be reimbursed to employees using an electric car.

HMRC’s advisory fuel rate for fully electric vehicles is currently 5p per mile. However, this rate is based on 2021 data from the Department for Business, Energy and Industrial Strategy. It is therefore not necessarily representative of the cost to employees of charging an electric car at their home in view of the significant increase in electricity costs during 2022. 

KPMG have hosted interactive workshops with businesses across a number of different sectors to ensure that all relevant issues, including the themes above, are considered and managed effectively as well as ensuring the organisation has the knowledge and support required to implement a car scheme that is both rewarding to employees and tax compliant.

Starting your journey

It pays to plan ahead when implementing an electric company car scheme. Being proactive and making key decisions early on can save you from having to make costly U-turns moving forward.

If you have any queries or would like to talk through how we can help with the implementation of a tax compliant electric company car scheme, please get in touch with Will McGahan, David Raistrick, or your normal KPMG contact.