Electric Vehicles, Salary Sacrifice, IFRS 16 and Scotland David Green dgreen@arlingclose.com

Many climate-conscious employers (including Arlingclose and many local authorities) have taken advantage of a government-backed scheme to provide their staff with electric vehicles. In a typical scheme, the employer leases cars from a company for three years (the head lease) and then provides them to employees in return for a salary sacrifice (the sub leases). The employee and employer get tax breaks, the company makes a profit and less petrol is burnt on the roads. Everyone’s a winner!

But let’s look at the accounting implications for the local authority employer.  Under the old IAS 17 lease accounting standard, both the head lease and the sub leases were considered operating leases, as three years is much shorter than the useful life of a new car. So the payments under the head lease were revenue expenditure, and the receipts from the sub leases were revenue income, which neatly netted off leaving no overall cost to the authority.

But things are not so simple under the new IFRS 16 standard. The head lease will be recognised as a capital transaction, creating right-of-use assets reflecting three years’ use of the vehicles, and a liability to pay the charges for three years. This will create revenue charges for interest and minimum revenue provision (MRP). The sub leases will then be disposals of the right-of-use assets, initially creating a finance lease receivable, followed by capital receipts and interest income when this is repaid. But the oldest rule in local government finance applies here, namely that capital receipts cannot be used to fund revenue expenditure, and so there will be shortfall in the revenue account.

Local authorities in England, Northern Ireland and Wales have some discretion over the charging of MRP, and many would argue it is prudent not to make a revenue charge to repay the debt created by the head lease, but to use the capital receipts from the sub leases to repay it instead. Proposed changes to MRP legislation and guidance in England would explicitly permit this. Remove the MRP charge and the interest income should offset the interest expense. The budget is balanced again.

However, local authorities in Scotland are not permitted to use capital receipts to repay lease debt and have much less discretion over the statutory charge that is equivalent to MRP. Council staff north of the border wanting to do their bit for the environment will either have to do without the tax breaks available to the rest of country, or encourage their employer to pass the revenue cost onto Council Tax payers.

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