Salary Sacrifice schemes for electric vehicles are hot right now. They offer big financial savings, simplicity, and ultimately have less environmental impact than traditional cars. All of which is underpinned by strong government policy support and growing employer demand.
It’s an appealing, win-win solution for employees and employers alike. Including here at Cooper Parry, where in our FY25 Impact Report Cooper-Parry-Impact-Report-FY25.pdf we talk about the 54 EV and 11 hybrid vehicles we have provided to our team of CPers.
When it comes to IFRS 16 (and the new requirements of FRS 102 for lease accounting) as applied to salary sacrifice company cars, the question we keep hearing is: “Do we treat this as a lease or not?”
The short answer? There isn’t one. The standard leaves room for interpretation, and right now, the market is split.
Here’s what we know.
FOUR ROUTES, ONE BIG GREY AREA
After digging into the guidance and industry practice, here are the main approaches we’re seeing:
It’s a lease. Capitalise as normal.
Straightforward, you recognise a liability for the lease and a right-of-use asset for the vehicle. But not everyone agrees on the next step.
It’s a lease, but where do the depreciation costs go?
Some guidance suggests treating them as staff costs.
It doesn’t meet the definition of a lease.
Why? Because the company doesn’t get “substantially all the economic benefits” or control the asset’s use. Employees can use the car personally as they wish, and so under this interpretation, there would be no lease liability or ROUA hitting the balance sheet.
It’s a lease, and a sub-lease.
You’d recognise both the lease liability for the company’s obligation to the leasing company, and an asset for the sub-lease receivable from the employee. The P&L impact is largely netted off. Complex, but technically possible.
WHY ROUTE 3 IS WINNING
Many businesses are leaning towards option 3. It’s simpler, avoids lease liability calculations, and is backed by some heavy hitters. The UK Government’s guidance for NHS Trusts (Group accounting manual IFRS 16 supplement page 14) advises against treating these arrangements as leases.
WHAT’S NEXT?
The interpretations are conflicting, and so it feels likely that the standard will need clarification in the future. Until then, the key is documenting your fact pattern and judgments clearly on the nature, purpose and the contractual arrangements in place with the leasing company and between you and the employee. Whichever route you choose as being most appropriate to your situation, make sure it’s well-supported.
NEED MORE DETAIL?
If you want sources or guidance for the options discussed above, we’ve got you covered. Get in touch with our team or connect directly with myself or Emma Nicholl to find out more.
