Car leasing arrangements and whether still a ‘company car’

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 [2014] 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.”

Could PAYE be used to help fund the Government’s raising of Apprenticeship standards?

In March, the Government published The Future of Apprentices in England – Funding Reform Technical Consultation. The closing date for responses is Thursday, 1 May 2014.

For the last year, the Government has been consulting on ways to improve the standard of Apprenticeships, and how the Government could assist employers financially towards the costs of ensuring apprentices reach a certain standard by the end of their Apprenticeship.

The consultation just published examines how Apprenticeship standards need to be improved and, importantly, how the Government intends to support this financially (i.e. the costs of training and assessment of Apprentices). This could affect payroll because one of the two Government Apprenticeship funding models being put forward will involve the PAYE system.

Employers already make PAYE payments to HMRC for PAYE income tax, National Insurance, Student Loan Deductions, and can adjust their total PAYE remittance due for the recovery of statutory payments. The idea is that once an employer has paid the training provider, they would be able to deduct the government’s Apprenticeship funding contribution from their next PAYE payment to HMRC. This is similar to the system that already exists for statutory payments such as the recovery of Statutory Maternity and Paternity Pay.

There are a number of problems with using the PAYE system to recovery Apprenticeship funding:

  • There will need to be alternative advance funding arrangements for employers who do not have a sufficiently large enough PAYE liability to offset the government Apprenticeship funding contribution (e.g. this would be similar to the current situation where an employer needs to apply for advance funding of, for example, SMP, because they have insufficient PAYE liabilities due).
  • Directing funding through the PAYE system may present additional challenges for employers running multiple payroll schemes.
  • Over half of employers outsource at least some of their PAYE tasks. Therefore, for example, how will the outsourcer know how much Apprenticeship funding should be offset against an employer’s PAYE remittance? Some payroll agencies may charge for any new Apprenticeship function, as it would not be part of the normal payroll.
  • In any event, under the PAYE model, all employers would have to update their payroll software. And there is a cost for developers in this, which will have to be passed on in some way!

Is it likely that Apprenticeship funding could affect your organisation? If so, if you don’t respond to the consultation you could find yourself having to implement yet further new payroll functionality that you’d rather have avoided if possible.

A couple of side issues too… If the Government doesn’t come up with a really cost effective means of supporting Apprenticeship funding, might employers be put off taking on Apprentices to meet the new standards?

Also, the consultation only talks about the future of Apprentices in England. What about Wales, Scotland, and Northern Ireland? The last thing employers need is to end of with different funding requirements depending on where Apprentices live and work!

Sending HMRC an FPS or EPS for 2014/15 before 2013/14 has ended

Do you want to submit your first RTI return for 2014/15 to HMRC before 6th April 2014? If so, this is for you!

From 5th March 2014, HMRC have announced that employers who want to run their payroll in advance of 6th April 2014 for payments made to employees on or after 6th April can send their 2014/15 Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) from 5th March. This is only providing that the employer’s payroll software has been updated with the 2014/15 specification FPS/EPS returns.

Employers who want to send in 2014/15 RTI returns early, as above, will also need to ensure they still have the capability to submit a “final” FPS/EPS return for 2013/14 covering payments made to employees on or before 5th April 2014. They’ll probably need to do this before they are in a position to start submitting returns for 2014/15. Do check the limitations of your payroll software or service.

Employers who use HMRC’s Basic PAYE Tools will be able to make their 2014/15 submissions from 3rd April 2014, provided that they have downloaded the 2014/15 version of the Tools on their computer. The 2014/15 version of the Tools will be available from 3rd April 2014.

Withdrawal of manual National Insurance Number Tracing Service

HMRC is withdrawing the CA6855 clerical tracing service on 31 March 2014, following the introduction of reporting PAYE in real time and the NINO (National Insurance number) Verification Request service (NVR).

If you have an employee’s National Insurance number you must use it when you make Full Payment Submissions (FPS) to report an employee’s payroll information to HMRC. If you use the wrong National Insurance number, use a ‘default’ number, or make one up your employee’s entitlement to benefits may be adversely affected.

NINO’s and new employees

New employees are supposed to give you notification of their NINO (e.g. on a form P45), or they may be able to produce another document that shows their NINO (e.g. old payslip or P60).

If you can’t get a NINO from a new employee, you must still send their details on the first FPS that includes a payment to them – but you must leave the National Insurance number field blank for that employee. You must not use an incorrect or ‘dummy’ National Insurance number. In the absence of a NINO the inclusion of the employee’s full name, postal address, date of birth, and current gender on the first FPS is of the utmost importance.

When you submit the first FPS covering the first payment of employment income to your new employee, HMRC will try to match the employee’s details to their National Insurance number.

If HMRC are able to match the employee’s National Insurance number with the details you provided:

  • you will get a message through the FPS submission route telling you the correct National Insurance number;
  • the employee will get a form P217 in the post telling them what their National Insurance number is.

If you do not receive a message from HMRC telling you the correct National Insurance number continue to leave the National Insurance number field blank for that employee until notified.

Never been issued with a NINO

If your employee is aged under 16 they will not have a National Insurance number and there is no employer or employee National Insurance contributions liability for employees under 16.

If your employee is between 16 and 20 years old and hasn’t received a National Insurance number, they should contact the HMRC National Insurance Helpline.

Any other employees who don’t have a National Insurance number (e.g. someone newly coming to the UK to live and work) should contact their Jobcentre Plus office (Social Security or Job Benefits office in Northern Ireland) and apply for a NINO.

Whenever a new employee doesn’t have a NINO, you must still send their details on the first FPS that includes a payment to them (as above) – but you must leave the National Insurance number field blank for that employee. You must not use an incorrect or ‘dummy’ National Insurance number.

Reminder to submit Fixed Protection 2014 applications by 5 April 2014

Did you build up a large pension pot before 6 April 2006 of £1.5 million or more and want to protect the tax relief available against contributions you and/or your employer made to that pension scheme? This is for you!

You can save as much as you like towards your pension but there is a limit on the amount of tax relief you can get. The lifetime allowance is the maximum amount of pension saving you can build up over your life that benefit from tax relief. If you build up pension savings worth more than the lifetime allowance you’ll pay a tax charge on the excess.

From 6 April 2014 the standard lifetime allowance will be reduced from £1.5 million to £1.25 million. You can protect your pension savings by applying for Fixed Protection 2014 (FP2014) but you must apply by 5 April 2014.

You can use the lifetime allowance checking tool to help you decide whether you should apply for FP2014.

If you want to apply for FP2014 you should notify HM Revenue & Customs (HMRC) using the online form. It’s secure, quick and easy to do and, unlike with postal applications, you’ll get immediate confirmation of receipt along with a reference to assist with any future enquiries. The email will tell you when you can expect to hear from HMRC regarding your application and should be stored safely as proof of submission.

If your application for FP2014 is accepted, HMRC will send you a certificate which should be shown to your pension scheme administrator every time you take any benefits from your pension scheme. Where you have successfully applied for FP2014, to keep this protection there are restrictions on any tax relieved pension savings that you can make from 6 April 2014.

Apparent Un-notified Terminations (pension payrolls)

On 28th February 2014, HMRC issued the following statement which will have relevance for occupational pension payroll schemes.

The HMRC statement is included verbatim, below.

Apparent Un-notified Terminations (AUTs) are produced by the National Insurance and Pay As You Earn Service (NPS) when it identifies a break in service where no notification has been received from the scheme.

To assist Single Tier Pension activities HMRC have re-prioritised the AUT workload. In order to minimise contact for scheme administrators HMRC will analyse the identified accounts and, where the period of contracted-out employment starts before 6 April 1997, use the main Scheme Contracting Out Number (SCON) to enforce a Guaranteed Minimum Pension (GMP) where possible.

Where a GMP has been enforced schemes will receive a GMP Statement (CA1625) with a reference of “enforced”. Where the period of membership starts after 5 April 1997 and where it has not been possible to enforce a GMP an AUT enquiry letter will be issued.

HMRC requests affected schemes give priority to this workload by responding to AUT enquiry letters and by contacting them immediately with the correct details if the incorrect SCON is shown on an enforced CA1625.

SAYE monthly savings limit doubles to £500 from 6th April 2014

With effect from 6th April 2014, the maximum aggregate amount of a person’s monthly contributions under a tax and NICs efficient SAYE share save scheme increases from £250 to £500.

The legislation to effect this change is the Income Tax (Earnings and Pensions) Act 2003 (Amendment to SAYE Option Schemes Contributions Limit) Order 2014.

An approved Save As You Earn scheme is a savings-related share option scheme. It must be available to all employees who’ve been with the company for a certain time. The scheme gives a participating employee a right – known as an ‘option’ – to buy shares with their Save As You Earn savings for a price that’s fixed at the start.

From April 2014, a saver can save up to £500 a month under the scheme out of their take-home pay. At the end of the savings contract (three, five – or sometimes seven – years) the employee can use the savings to buy the shares.

The interest and any bonus received at the end of a SAYE savings scheme is tax free. Also, an employee will not pay any PAYE income tax or Class 1 NICs on the difference between what they pay for the shares when they exercise their option and what the shares are actually worth.

A SAYE saver may have to pay Capital Gains Tax when they sell the shares. But the employee won’t pay any if they put the shares into an ISA or a pension as soon as  they buy them.

HMRC updates its advisory fuel rates from 1 March 2014

On 27 February, HMRC published updated advisory fuel rates that can be paid tax-free to employees driving employer provided vehicles to cover just their business mileage. The same rates can also be used to charge employees for private mileage costs paid by their employer.

The new rates apply to all business journeys on or after 1 March 2014, although until the end of March employers can continue to use the previous advisory fuel rates, applicable from 1 December 2013.

The new rates per mile are as follows; the figure in parenthesis is the amount between 1 December 2013 and 28 February 2014):

  • Petrol engine cars: 1400cc or less – 14p (14p); 1401-2000cc – 16p (16p); over 2000cc – 24p (24p); based on 129.2p/litre (129.9p/litre).
  • Diesel fuelled cars: 1600cc or less – 12p (12p); 1601-2000cc – 14p (14p); over 2000cc – 17p (17p); based on 136.8p/litre (137.5p/litre).
  • LPG fuelled cars: 1400cc or less – 9p (9p); 1401-2000cc – 11p (11p); over 2000cc – 17p (16p); based on 71.5p/litre (70.0p/litre).

The above rates are part of HMRC’s quarterly review of their advisory fuel rates.

Increase in statutory employment rights limits 2014

The Government has published its Employment Rights (Increase of Limits) Order 2014 which applies from 6th April 2014, and will see the maximum weekly amount of statutory redundancy pay rise from £450 to £464.

The 2014 Order announces the following increases with application to all effective dates of termination occurring on or after 6 April 2014:

  • Statutory redundancy pay: from £450 to £464 a week (maximum statutory payment – based on 20 years’ service over the age of 21 multiplied by 1.5 weeks – from £13,500 to £13,920).
  • Minimum amount of compensation in cases of unfair dismissal: from £5,500 to £5,676.
  • Maximum amount of compensation in cases of unfair dismissal: from £74,200 to £76,574.

The amount of a day’s guarantee payment increases from £24.20 to £25.00.

The increases made by this Order reflect the increase in the retail prices index of 3.2% from September 2012 to September 2013.

New online portal for employers applying DEOs issued by the Child Maintenance Service

Do you operate a Deduction from Earnings from one or more of your employees under the direction of the Child Maintenance Service (CMS)? This affects you, and will also affect any employer who receives a new Order issued by CMS.

Currently, in the UK employers can be required to operate a Deduction from Earnings Order (DEO) issued by the Child Support Agency, as well as one of the newer DEOs issued under the CMS. The newer CMS orders were introduced gradually since 2012 and are now open to all separated parents. The CMS will totally will replace the Child Support Agency by 2017/18, when all current CSA cases have closed.

A new service, the Child Maintenance Service Employer Self Service, is gradually being introduced from February 2014 to replace the old paper-based system with a new free online portal. It is part of the government’s long-term economic plan to abolish or improve outdated, burdensome, or over-complicated processes which waste businesses’ time and money.

The new online service is available for all employers who administer Deduction from Earnings Orders with the Child Maintenance Service.

The new Service works like online banking, helping employers manage their account whenever it is convenient for them to do so. They can check their monthly Deduction from Earnings Order schedules, make safe and secure payments, send enquiries, and give feedback.

Businesses will also be able to report when any employee for whom they deduct maintenance stops working for them in one easy click through to the Child Maintenance Service Employer Self Service website.