Car lease to be treated in the same way as company car
11 April 2014
Section 2.192 of the Budget 2014 confirmed two things about company cars, one as announced in the Autumn Statement and the other as a result of HMRC losing at Appeal in the Upper Tribunal in February 2014.
Where an employer leases a car to an employee, the benefit is taxed as a company car benefit rather than as employment earnings.
From April 2014 the government has repealed section 114(3) of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003.
A tribunal HMRC v Apollo Fuels Limited and others, where the leasing of a car by an employer for some employees was contested by HMRC, is the ultimate reason for this change in legislation. The initial tribunal determined that the arrangements entered into by a group of companies to provide cars to their employees and to pay them mileage allowances did not give rise to any liability to tax. The Tribunal also overturned HMRC’s assessment that National Insurance Contributions were payable in respect of the use of the cars provided and on the payments made in respect of mileage allowances.
Because ‘Apollo Fuels Ltd and Others’ had formed the view that the provision of the cars was not a taxable benefit, they did not deduct the tax now alleged to be due from the employees’ pay under the PAYE scheme or notify HMRC through a P11D that cars were being provided to the employees under the leases. HMRC, having concluded that the cars are subject to tax, served notices of assessment for that tax on the employees rather than on the Group, under section 29 of the Taxes Management Act 1970. It was the employees therefore who brought the appeal before the Tribunal in respect of the liability to tax on the car benefit.
After a somewhat lengthy investigation, the court decision in the appeal was the same as that of the First-tier Tribunal, albeit not for all the same reasons. You can read the summary of conclusions on page 24 of the case - HMRC v Apollo Fuels Limited and others.
Legislation has now been introduced to repeal section 114(3) ITEPA 2003, which will prevent a car benefit charge if the provision of a company car or van constitutes earnings from employment under any other provision. By repealing section 114(3) ITEPA 2003, it will allow HMRC to rely on the provision at section 64 ITEPA 2003, which ensures that the full amount of a car or van benefit is subject to tax, if an amount could be both earnings under section 62 ITEPA 2003 and treated as earnings under the benefits code.
Thus ensuring that where an employer leases a car to an employee, the benefit is taxed as a company car benefit rather than as employment earnings.
2014-15 will also see legislation being introduced to amend sections 144(1) and 158(1) ITEPA 2003, putting beyond doubt that payments for private use of a company car or van need to be made in the tax year in which private use was undertaken.
The case of Apollo Fuels Limited and the resulting change to legislation serves as a timely reminder, if one were needed, that HMRC are tightening up on any measures that they view as examples of avoidance.