Beware the phantom of the OpRA

25 January 2019

This article was featured in the March 2019 issue of the magazine.

Robin Woodhouse, employment taxes principal for PSTAX, reveals unintended tax consequences for assets transferred to employees following a period of use under salary sacrifice arrangements

Sections 69A and 69B of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which deal with optional remuneration arrangements (OpRAs), were inserted by Finance Act 2017 with effect from tax year 2017–18. The new legislation ensures that, subject to transitional provisions and some specific exceptions (below), most of the tax advantages of employee salary sacrifice schemes are lost from 2017–18. This is because the taxable value of a salary sacrifice benefit in kind is now the greater of the salary sacrificed by the employee and the statutory taxable value of the benefit.

From 2017–18, an employee benefit in kind is deemed to have been provided under an OpRA if it is: 

  • in return for the employee giving up the right (or a future right) to receive an amount of earnings, or 

  • under arrangements by which the employee agrees to be provided with a benefit rather than an amount of earnings.

The new rules apply equally to tax-exempt benefits in kind, which become taxable if provided under an OpRA. __However, certain specified benefits (e.g. childcare, pensions, cycle to work scheme and ultra-low emission vehicles) are excluded from the new OpRA rules and retain their tax exemptions when provided via a salary sacrifice arrangement.

Transitional rules allowed salary sacrifice arrangements that had been entered into before 6 April 2017 to continue under the old regime until the earlier of a variation/renewal of the terms or 6 April 2018 (i.e. the start of tax year 2018–19). Where, however, the benefit is the provision of a car which has carbon dioxide emissions over 75g/km or living accommodation or school fees, the transitional cut-off date is 6 April 2021.

The OpRA changes had been expected for some time and really do nothing more than put all taxpayers on an equal footing. From 2017–18, all employees earning the same value remuneration package will pay broadly the same amount of tax on that package, whether or not they participate in salary sacrifice arrangements. The government claims this is to ensure fairness, although it is clearly aimed at minimising the loss of tax revenues the Treasury had been suffering through the growing popularity of salary sacrifice arrangements.

Let us consider the case of an employee who, since 2017–18, has had the use of an employer-owned fridge-freezer under a ‘white goods’ salary sacrifice arrangement whereby ownership of the asset passes from employer to employee at the end of a specified period of, say, one year. This type of arrangement has been popular in the workplace and, although diminishing since OpRA, continues to be used in some sectors such as the National Health Service.

Under the tax legislation in place before 2017–18 there would have been two benefit-in-kind tax charges for the two separate events (i.e. the use of the asset and its subsequent transfer). The first ‘use of asset’ charge (under section 205, ITEPA 2003) would have been, annually, 20% of the asset’s market value when first used to provide an employee benefit. The second ‘transfer of asset’ charge (under section 206, ITEPA 2003) would have been based on the asset’s market value as at the date of its transfer to the employee.

However, where an asset is transferred to an employee after it has previously been used to provide a benefit in kind, the ‘transfer of asset’ charge at section 206(3) becomes the higher of: 

  • the asset’s market value at transfer, and 

  • its market value when first used to provide an employee benefit less any amounts determined under section 205.

Consequently, under the OpRA legislation in place from 2017–18, there will be a potentially greater tax liability than previously using the above example.

The ‘use of asset’ charge will now be the greater of the section-205 amount (i.e. 20% of its market value when first used to provide an employee benefit) and the salary sacrificed by the employee for the asset’s use, which might be as much as its new value. Second, the ‘transfer of asset’ charge under section 206(3) will be the higher of: 

  • its market value at transfer, and 

  • its market value when first used to provide an employee benefit less any amounts determined under section 205.

Let’s put some figures on our example. The employee has the use of an asset with an original market value of £1,000 from 6 April 2017 until 5 April 2018, at which point ownership is transferred to him at a second-hand value of £500. The employee gives up £1,000 salary under a salary sacrifice scheme.

Under OpRA, the 2017–18 ‘use-of-asset’ benefit in kind will be the greater of the section 205 benefit (i.e. £1,000 × 20% = £200) and the salary sacrificed (£1,000).

The subsequent ‘transfer-of-asset’ benefit in kind will be the greater of the asset’s market value at transfer (£500) and its market value when first used to provide an employee benefit less any amounts determined under section 205 (i.e. £1,000 - £200 = £800).

This gives a total benefit-in-kind charge of £1,800 for an asset that was never worth more than £1,000 in the first place. This effective double-charge, due to effect of OpRA, could have been avoided if ownership of the asset had been transferred to the employee at the outset, thus taking the ‘use-of-asset’ element out of the equation.

In that case, the benefit in kind charge would have been restricted to the transfer of the asset at its original market value of £1,000. 



Many scheme providers have been quick to recognise the problem and have amended their schemes accordingly. However, employers should check their scheme terms to ensure this particular phantom is exorcised for good.