HMRC loses company car tax case

HM Revenue and Customs (HMRC) has lost its appeal against Apollo Fuels providing its employees with cars that were exempt from tax after the Upper Tribunal (Tax and Chancery Division) found in favour of the organisation.

Six companies in the Newell and Wright group, including Apollo Fuels, provided cars to managers and salesmen under an arrangement whereby it leased the cars to the workforce in an ’arm’s length’ hire rental.

Employees were paid for business mileage at the same rate as colleagues who used their own cars for business purposes.

The organisation did not consider the provision of the cars to be a taxable benefit, so did not deduct the tax that HMRC claims is due under pay-as-you-earn rules set out in the Income Tax (Earnings and Pensions) Act 2003. It also did not notify HMRC that cars were being provided to employees under the lease.

HMRC argued that cars should be subject to normal car benefit rules. However, the court agreed that the payment of lease rentals was covered by employees, and so was not subject to tax or national insurance contributions.

The First Tier Tribunal ruled in 2012 that cars provided to employees under market value leases and mileage allowance were exempt from benefit-in-kind (BIK) tax.

HMRC later appealed against the decision at the Upper Tribunal, but lost again on the grounds that employees gained no economic benefit from the leasing arrangements.

However, the 2014 Budget confirmed the closure of the type of tax scheme adopted by Apollo Fuels.

David Heaton, a partner at Baker Tilly, said: “The judge said you cannot have a taxable benefit without an economic benefit. She reasoned that if an employee buys a service from their employer at arm’s length, there can be no advantage to the employee, so there is nothing to tax.

“In theory, the employees were only leasing from the company what they could have leased from an independent car leasing business, so there was no value to them in the lease. HMRC thought a scale charge [based on the carbon dioxide emissions scale] should apply because the lease payments were less than the scale charge.”

Alastair Kendrick, tax director at MHA MacIntyre Hudson, added: “Employers now need to take account of the Finance Bill changes. Employers offering cars to employees to avoid a BIK need to ensure title transfers to employees at the outset. If this does not occur, HMRC is likely to look for a BIK on the car.

“There are significant risks to employers that operate schemes of this type without title transferring.”