Do arm’s length leasing arrangements between the employee and its employees take the provision of leased cars out being treated as ‘company cars’? This was the question in the Upper Tax Tribunal case of HM Revenue And Customs v Apollo Fuels Ltd & Ors  UKUT 95.
In this case, the employer made an arrangement whereby it leased cars to the workforce for an arm’s length hire rental. Under the arrangements, employees were told that they would be paid for business mileage at the same rate as other employees who used their own cars for business purposes.
Sums due to the employees as mileage allowance payments were set off against the rentals they owed to the employer under the car leases. If an employee gave notice to leave they either had to (a) complete a standing order mandate for future rentals if they wished to continue hiring the vehicle, or (b) return the vehicle and make good any money owing against their termination pay.
The lease also provided that an employee could cancel the agreement at any time, subject to seven days’ notice or mutual agreement. The lease did not restrict in any way the use that could be made of the car by an employee.
HMRC accepted that the rental paid by the employees under the individual leases was an arm’s length commercial rental as would be paid for the particular car if the employee had hired it from a third party car hire company.
However, as far as HMRC were concerned the provision of cars by means of the leasing arrangement was still a taxable benefit under Chapter 6 (Taxable Benefits: Cars, Vans, and Related Benefits) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Therefore, there was also an amount of income tax and NICs due on the mileage payments.
The Upper Tax Tribunal judgement runs to many pages and involves a careful examination of an amount of case law. Therefore, the summary in this case is given below, along with certain comments.
“The car leases do not create proprietary rights and there is no transfer of any property in the car to the employees. The arrangements are not therefore excluded from section 114 by the wording in parentheses in subsection (1)(a).”
Section 114 of ITEPA charges to income tax a car that is “(a)…made available (without any transfer of the property in it) to an employee or a member of the employee’s family or household… and (c) is available for the employee’s or member’s private use”.
There was an amount of argument in this case as to whether the car leasing arrangement did transfer some kind of proprietary interest to the employee. If so, this would have removed the provision of the car from under Section 114. The Tribunal Judge thought there was no proprietary transfer in the lease arrangement. However, he then went on to state:
“If I am wrong on that and the lease does transfer a proprietary interest in the car to the employee, then the scope of that interest is sufficient in this case to mean that the condition in parentheses in section 114(1)(a) [“without any transfer of the property”] is not satisfied and the car will not fall within section 114.”
Interestingly, the Tribunal Judge seemed to consider that even if the car leases didn’t involve any proprietary transfer to employees, Section 114 of ITEPA still didn’t apply for the following reasons.
“Further, the cars leased to the employees do not fall within section 114 because an amount constitutes earnings from the employment in respect of the benefit of the car because the car is under these leases ‘money’s worth’ for the purposes of section 62 and hence falls to be taxed under section 62 [Earnings], even if that amount is in fact nil. The application of section 114 is therefore excluded by section 114(3).”
Section 114(3) excludes from being taxed under Section 114(1) any car, van, or related benefit, where “an amount constitutes earnings from the employment… by virtue of any other provision [in the Judge’s view in this case, Section 62 of ITEPA].”
“Further, [according to the Judge] the cars leased to the employees do not fall within section 114 because fair bargains are excluded from the regime for taxing benefits conferred on employees because there is no benefit which is properly subject to tax. Since HMRC accept that the leases between the employer and the employees were at arm’s length, there is no benefit here which is subject to tax under Chapter 6.”
BUT, and here the Judge qualifies his judgement…
“If I am wrong and section 114 does apply to these leasing arrangements, then these cars are ‘company cars’… and so the mileage allowance payments made to the employees do not benefit from the exemption in section 229 [mileage allowance payments paid to those using their own vehicles for work-related journeys] and do fall to be taxed.”
It seems that the judgement in Apollo’s favour will be short-lived. In Budget 2014, it was stated that the government intends to (by legislation to be brought forward in the Finance Bill 2014): “Ensure that where an employer leases a car to an employee, the benefit is taxed as a car benefit rather than as employment earnings.”