[2009] UKFTT 311 (TC)

TC00255

 Appeals numbers: TC/2009/11122 and TC/2009/12945 

INCOME TAX – cars leased by employees from employer – car benefits and fuel benefits – mileage allowance payments – deductibility of lease rentals in calculating cash equivalent of benefits - appeals dismissed –Part 3 ITEPA 2003

FIRST-TIER TRIBUNAL	     

TAX 

		
	                       MR ANDREW WHITBY & MR VICTOR BALL		Appellants

                -and-

		                      THE COMMISSIONERS FOR HER MAJESTY’S           Respondents
	                                           REVENUE & CUSTOMS        

 		         
Tribunal:	Mr Peter Kempster	(Judge)	
	Mr Mohammed Farooq	(Member)	

Sitting in public in Birmingham on 21 October 2009

Mr RA Platt (Crowfoot and Company Limited, Chartered Accountants) for the Appellants 

Mrs B Robinson (HMRC Appeals Unit) for the Respondents 

© CROWN COPYRIGHT 2009

			     DECISION NOTICE

1. Mr Whitby and Mr Ball are directors of Branall Ltd (“the Employer”).  In common with a number of other employees of the Employer they entered into car leasing contracts with the Employer.  Following a PAYE audit visit in April 2006 HMRC formed the view that there were income tax and National Insurance (“NI”) implications of the car arrangements that had not been properly reported.  HMRC raised income tax assessments on the employees and NI determinations on the Employer.  With the Tribunal’s consent the parties have agreed that the appeals of Mr Whitby and Mr Ball should be test cases to determine the taxability of the car arrangements.  Accordingly, the matters discussed during the hearing and covered in this decision notice sometimes range wider than the individual affairs of Mr Whitby and Mr Ball.

The assessments and the appeals

2. The disputed elements of the assessments (which comprised a mixture of assessments, closure notices, and amendments to returns) in respect of Mr Whitby and Mr Ball are as follows:

Year of assessment	Car benefit
£	Fuel benefit
£	“Excess mileage”
£	Total benefits
£	
Mr Whitby					
					
2002-03		2,850	3,680	6,530	
2003-04		2,592	3,771	6,363	
2004-05		2,592	3,891	6,483	
2005-06		2,736	3,990	6,726	
2006-07			4,570	4,570	
					
Mr Ball					
					
2002-03			3,396	3,396	
2003-04		2,880	3,481	6,361	
2004-05		3,168	3,591	6,759	
2005-06	96	3,312	3,683	7,091	
2006-07	96		3,715	3,811	

3. Mr Whitby appealed against all the assessments on 19 May 2008 and Mr Ball did likewise on 27 May 2008.  HMRC have accepted the appeals as validly made.  The parties assured the Tribunal that the exact figures for both Appellants and also the other employees were either agreed or could be ascertained from information already prepared and reasonable assumptions proposed.  Mr Platt accepted that the NI determinations on the Employer would follow from the income figures for the employees.  In aggregate the amounts of tax and NI involved are substantial.

Background

4. There was no significant dispute over the relevant facts.

5. The Employer is a wholly owned subsidiary of Stirling Solutions Ltd (“Stirling”) (a holding company).  The Employer commenced trading in around 1994 and its business at the relevant time was provision of specialist software programs for the haulage industry.  All employees were contracted to the Employer.  Prior to 2003 the Employer had approximately ten company cars provided to employees.  Around 2003 new arrangements were entered into whereby Stirling bought around a dozen cars and leased them to the Employer.  The Employer in turn leased them to certain employees (including Mr Whitby and Mr Ball).

6. The Tribunal were told that the car lease terms were arms’ length with the lessor bearing the costs of servicing, insurance and road fund licence.  A specimen lease was provided from which it appeared that the lessor was Stirling, rather than the Employer.  Also, the insurance obligation was on the lessee, although there was also in evidence a fleet insurance policy in the name of Stirling.  Further, there was a side letter agreement whereby the lease would terminate in the event of the lessee/employee ceasing to be employed by the Employer.  Having discussed these points with the parties it was agreed that the Tribunal should proceed on the basis that the lessor was the Employer or a company associated with the Employer, and that there was nothing exceptional about the lease terms.

7. There was no restriction on the use of the cars, so that they could be used by the lessees for private purposes as well as work duties, and they could also be used by spouses.  The employees were entitled to claim a mileage allowance from the Employer to cover business mileage.  Mileage logs were kept to justify these claims.  Only business mileage, not private travel, was eligible.  Claims were paid at the “approved mileage allowance payments” rates allowed by statute (of which more later).

8. Following their PAYE audit HMRC formed the view that the cars, notwithstanding the leasing arrangements, gave rise to a benefit in kind; that scale benefits for both the car and fuel were taxable; that the mileage allowances gave rise to further taxable benefits; that some mileage allowance payments had covered private, as opposed to business, mileage in that they related to home-to-work travel; and that this all also had NI consequences for the Employer.  

9. There were a number of meetings and exchanges of correspondence during which it appears to the Tribunal that the Employer was fully co-operative with HMRC in trying to establish the correct basis of tax (and NI) charge.  However, these reached an impasse – hence the hearing of these appeals as test cases for the current Appellants, the other employees and the Employer.

The legal arguments before the Tribunal

10. The legislation cited below is from the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).  Although the year of assessment 2002-03 preceded the commencement of ITEPA, the parties agreed that the former legislation (in Part V of the Income and Corporation Taxes Act 1988) was not different in effect.

Car benefit - The charge under section 114
11. Section 114 provides, 
“This Chapter applies to a car or a van in relation to a particular tax year if in that year the car or van—
(a)     is made available (without any transfer of the property in it) to an employee or a member of the employee's family or household,
(b)     is so made available by reason of the employment (see section 117), and
(c)     is available for the employee's or member's private use (see section 118).”
12. Mr Platt for the Taxpayers disputed that condition (a) was satisfied.  He contended that the car was not “made available (without any transfer of the property in it) to an employee” because the individual acquired the use of the car pursuant to the car lease.  That was an arms’ length contract with a substantial rental payment being made (typically around £5,400 annually).  “Making available” was not an event but a process.  Signing the lease was an event but thereafter the Employer had no control over, for example, where the car was parked.  Further, the situation should be governed by substance rather than form; the leases would be accounted for by a corporate lessee, under Statement of Standard Accounting Practice number 21, as finance leases because the risks and benefits of the asset were with the lessee.  The employees took over all responsibilities for the car so it was incorrect to regard the car as a “company car”.  Mr Platt referred to the VAT position of businesses buying cars where some private use is envisaged, contrasted with those buying the cars in order to lease them onward; he contended that the ability to reclaim input tax in the latter circumstances evidenced an intention to treat lease vehicles significantly differently from “company cars”.  To say that a car benefit arises under section 114 would produce an iniquitous result.
13. Mrs Robinson argued that, given the absence of any definition in the statute, the words “made available” should bear their ordinary meaning of “capable of use”.  If the employee does not own the car but has permission to use it then the car is within section 114.  The VAT treatment referred to was contained in a leaflet with no legal force; any guidance was confined to VAT and had no application to income tax.  There might have been different tax consequences if the leases had been with an unconnected lessor but in fact that was not what happened; HMRC believed that the arrangements entered into were designed in part to give the Employer a degree of control over what sort of vehicle the employees would drive to meetings with their customers. The Employer was not in the usual business of car leasing; it entered into these arrangements only because the lessees were its employees.  
14. The Tribunal considers that Chapter 6 of Part 3 of ITEPA is designed to be a self-contained code determining the income tax consequences of “Taxable benefits: cars, vans and related benefits”, as it is headed.  While there are doubtless good reasons for the accounting treatment to be adopted by a corporate lessee, or the VAT treatment of vehicle purchases, those do not assist in interpreting the words of section 114.  It had been accepted by the Taxpayers that the leasing contracts were between the Employer (or a company associated with the Employer) and the employees.

15. The Tribunal drew the attention of the parties to the High Court case of Christensen v Vasili [2004] STC 93.  There a car was jointly owned between employer and employee, and the taxpayer argued that once the car was co-owned it could not be said that the employer made the car available, without any transfer of the property in it, to the employee.  That was rejected by Pumfrey J who said (at paragraph 12 of his judgment), “I consider that the words 'made available (without any transfer of the property in it)' are not to be construed in a manner which has the result that the conferring of any interest upon the employee sufficient to give the employee an independent right to possess and use the asset is sufficient to prevent the car from being 'made available'.”  The Tribunal concludes that if that is the case for co-ownership then it must also be the case for a lessor/lessee relationship. 

16. For those reasons the Tribunal concludes that the car was made available to the employee within the meaning of section 114.  

17. Mr Platt conceded that if condition (a) was satisfied then, on the facts, conditions (b) and (c) were also satisfied.  Mrs Robinson pointed out that condition (c) does not require the employee to make private use of the car, only that the car is available for such use.
18. The Tribunal concludes that section 114 operates so as to apply the provisions of Chapter 6 to the cars in question.

Calculation of the car benefit

19. Section 120 states, “If this Chapter applies to a car in relation to a particular tax year, the cash equivalent of the benefit of the car is to be treated as earnings from the employment for that year.”
20. Section 121 gives the method of calculating the cash equivalent of the car benefit.  It is basically a percentage of the cost of the car (including accessories) but Step 8 of the calculation is, “Make any deduction from the provisional sum under section 144 in respect of payments by the employee for the private use of the car.”
21. Section 144 states, 
“(1) A deduction is to be made from the provisional sum calculated under step 7 of section 121(1) if, as a condition of the car being available for the employee's private use, the employee—
(a)     is required in the tax year in question to pay (whether by way of deduction from earnings or otherwise) an amount of money for that use, and
(b)     makes such payment.
(2) If the amount paid by the employee in respect of that year is equal to or exceeds the provisional sum, the provisional sum is reduced so that the cash equivalent of the benefit of the car for that year is nil.
(3) In any other case the amount paid by the employee in respect of the year is deducted from the provisional sum in order to give the cash equivalent of the benefit of the car for that year.”

22. During the negotiations leading up to the issue of the assessments, HMRC had accepted that a deduction under section 144 was available by reference to the car lease rentals paid by the employee.  Both parties described this as a concession, which the Tribunal interpreted as meaning that although the strict technical requirements of section 144 may not have been satisfied, HMRC was prepared to allow a deduction under that provision for the whole of the rental payments made by the employee to the Employer in a particular year of assessment.  The evidence before the Tribunal was that the private use of the car was typically less than 20% of total mileage yet the entire rental payments were deducted.  The Tribunal was told that for most of the employees this resulted in a Nil or negligible car benefit amount, although there were a few employees who did have significant car benefits still assessable.  HMRC’s view was that having taken this action, the restriction in section 144(2) allowed the reduction of the benefit to Nil but no further – in other words, there was no excess deduction available to be used elsewhere.  

23. Mrs Robinson submitted that no relief was available under “step 3” of the calculation under section 121(1): “Make any deduction under section 132 for capital contributions made by the employee to the cost of the car or accessories” as this covered only capital contributions and not ongoing payments, such as the lease rentals.  The Tribunal agrees with Mrs Robinson’s interpretation.

24. The Tribunal considers that it should not interfere to disturb the negotiated position agreed between the parties in relation to the deduction of the lease payments in arriving at the cash equivalent of the car benefits.  However, as the issue of the lease payments arises again in relation to the mileage allowances (see below) we do comment that the ability to make any “step 8” deduction assumes that the lease payments relate, in whole or part, to private use of the car.

Fuel benefit - The charge under section 149
25. Section 149 provides, 
“If in a tax year—
(a)     fuel is provided for a car by reason of an employee's employment, and
(b)     that person is chargeable to tax in respect of the car by virtue of section 120,
the cash equivalent of the benefit of the fuel is to be treated as earnings from the employment for that year.”
26. It has already been established that the employees were chargeable under section 120, so condition (b) is satisfied.  Condition (a) is addressed in section 149(3) which states, “Fuel is to be treated as provided for a car, in addition to any other way in which it may be provided, if … (d) any sum is paid in respect of expenses incurred in providing fuel for the car.”  
27. The employees were paid the mileage allowances so this condition is also satisfied.  Thus, fuel benefits arise to the employees.

Calculation of the fuel benefit

28. Section 150 gives the method of calculating the cash equivalent of the fuel benefit.  It is basically a percentage of a statutory amount.
29. However, there is an important relief in section 151: 
“(1) The cash equivalent of the benefit of the fuel is nil if condition A or B is met.
(2) Condition A is met if in the tax year in question—
(a)     the employee is required to make good to the person providing the fuel the whole of the expense incurred by that person in connection with the provision of the fuel for the employee's private use, and
(b)     the employee does make good that expense.
(3) Condition B is met if in the tax year in question the fuel is made available only for business travel (see section 171(1)).”
30. As already stated, it was a term of the mileage allowance arrangements that employees could claim only for business mileage.  However, following the PAYE audit the Employer conceded that some of the claims paid to some of the employees did contain an element of home-to-work travel.  This was inadvertent by both the Employer and the relevant employees, and resulted from differing interpretations of the usual work patterns of those individuals.  
31. For those employees who did not receive any payment in respect of private mileage, HMRC accepted that the fuel benefit was Nil, pursuant to section 151.
32. For those employees who did (unintentionally) receive some payments in respect of private mileage, HMRC assessed the cash equivalent fuel benefit, pursuant to section 150.  Mrs Robinson submitted that, save for the relief in section 151, the charge under section 150 was “all or nothing”; and Mr Platt accepted that an employee who was aware of the likelihood of a section 150 charge would usually forgo the benefit of reimbursement of fuel for private use and so bring themselves within section 151 – of course, in the current case the tax charge had emerged only after the event.  

The payment of the mileage allowances
33. The mileage allowances paid by the Employer to the employees were set at a level designed to qualify them as “approved mileage allowance payments” (“AMAPs”) within section 229, which states, 
“(1) No liability to income tax arises in respect of approved mileage allowance payments for a vehicle to which this Chapter applies (see section 235).
(2) Mileage allowance payments are amounts, other than passenger payments (see section 233), paid to an employee for expenses related to the employee's use of such a vehicle for business travel (see section 236(1)).
(3) Mileage allowance payments are approved if, or to the extent that, for a tax year, the total amount of all such payments made to the employee for the kind of vehicle in question does not exceed the approved amount for such payments applicable to that kind of vehicle (see section 230).”
34. The approved amounts in section 230 are the familiar 40p per mile for the first 10,000 business miles in a tax year, and 25p per mile thereafter.  Those were the amounts set by the Employer for the mileage allowances and so the Employer expected that there would be no tax consequences for the employees (other than those who received the inadvertent payments for private mileage).
35. However, section 229 (4) states, “Subsection (1) does not apply if … (b) the vehicle is a company vehicle (see section 236(2)).”  Section 236(2) provides: “For the purposes of this Chapter a vehicle is a “company vehicle” in a tax year if in that year … (b) the cash equivalent of the benefit of the vehicle is to be treated as the employee's earnings for the tax year by virtue of … section 120 (benefit of car treated as earnings) …”.
36. Mrs Robinson contended that this provision meant that the cars were company vehicles within section 236 and thus the AMAPs exemption was not available.  Mr Platt contended that this should not be the case for those employees who did not have a car benefit under section 120 where the “step 8” deduction eradicated any benefit.  The Tribunal does not accept Mr Platt’s argument; for those employees there is a cash equivalent of the car benefit but its amount is Nil after the “step 8” deductions.  Accordingly, we accept Mrs Robinson’s argument that the AMAPs exemption in section 229 is not available to any of the employees.  
37. As the mileage allowance payments fall outside the AMAPs exemption, their taxability must be examined.  
38. HMRC accepted that so much of the payments as amounted to a reimbursement of cost of fuel used on business travel should not be taxed.  To establish this amount they used the “advisory fuel rates” published by HMRC.  These have no statutory basis but, in the words of HMRC’s website, “… are intended to reflect actual average fuel costs at the time they are set. The aim is to save time for both employers and HMRC by setting out some figures that can be used in the majority of cases. They give employers more certainty about what the mileage rates that they choose to apply mean for tax and National Insurance contributions. … If the rate paid per mile of business travel is no higher than the advisory rate for the particular engine size and fuel type of the car, HMRC will accept that there is no taxable profit and no Class 1 NICs liability. This reflects the fact that they are intended to reflect actual average fuel costs.”
39. For the tax years in question the applicable advisory fuel rate was around 9p to 11p per business mile.  Given the mileage allowances being paid by the Employer, that left 14p to 31p per mile of the allowance as being above and beyond the estimated fuel cost.  HMRC considered that amount represented a cash payment to the employee and they assessed those “excess mileage benefits” (as HMRC termed them) to income tax.
40. Mr Platt contended that the mileage allowances should be reduced by more than just the advisory fuel rates.  He argued that the employees had also incurred further costs in driving those business miles – namely, the car rental payments under the car leases.  Costs that a car owner would normally incur (such as servicing, road fund licence etc) were borne by the Employer/lessor and the only cost to the driver/employee was the car lease rental payments.  A proportion of those costs should be deductible from the mileage allowances, as well as the fuel element.
41. Mrs Robinson objected to this argument on three alternative grounds.  First, she reserved HMRC’s position as to whether they would accept that car lease payments incurred by an employee could be reimbursed without a benefit in kind arising.  Secondly, she stated that HMRC having, by concession, accepted that the lease payments could be deducted in arriving at the amount of the car benefit (the “step 8” deductions) considered that those payments were then exhausted and even if they exceeded the car benefit any excess was not deductible elsewhere – see section 144(3).  Thirdly, if a strict analysis of the lease payments were to be undertaken then the likely conclusion was that they comprised a duality of purpose, in that they covered hire of the car for both business use and private use, and thus no deductions should be available at all (including perhaps in the “step 8” deduction) rather then there being the possibility of further deductions from the mileage allowances.
42. The Tribunal considers that if Mr Platt’s argument is to succeed then it must be based on a statutory entitlement of the employees to take an income tax deduction for part of the lease payments.  Mr Platt did not refer to any statutory authority but the Tribunal has in mind the provisions of Part 5 of ITEPA: “Employment income: deductions allowed from earnings”, and in particular section 336 (which gives the general rule requiring the amount to be incurred wholly, exclusively and necessarily in the performance of the duties of the employment) and section 337 (travel for necessary attendance).  If those are the provisions on which the Appellants rely then the Tribunal considers that there is the problem that both sections contain the requirement that “the employee is obliged to incur and pay [the lease rentals] as holder of the employment”.  That requirement is not satisfied in the circumstances of the current case; the car rentals obligation arises qua lessee not qua employee.  It may be that that is too restrictive a reading of those statutory provisions but as the point was not argued before us in any detail and we find that flaw, we consider that the Appellants have not established to the necessary standard of proof a statutory entitlement for the employees to deduct any part of the lease rentals from the mileage allowances.  We also find that there is no other ground, either submitted to us or within the Tribunal’s reasonable interpretation of the car leases and the agreement between the parties as to the “step 8” deductions, that gives any entitlement to the employees to deduct any part of the lease rentals from the mileage allowances.
Conclusions and findings 
43. The Tribunal makes the following conclusions and findings.
44. The burden of proof is on the Appellants and the applicable standard of proof is that of the balance of probabilities.  The cars fall within the provisions of Chapter 6 of Part 3 of ITEPA by virtue of section 114.  The cash equivalent of the car benefit is taxable as earnings by virtue of section 120 and is calculated according to section 121.  The Tribunal notes that HMRC have agreed that the lease rentals paid by the employee can be deducted under step 8 of the calculation in section 121(1).  For all the employees the cash equivalent of the fuel benefit is taxable as earnings by virtue of section 149.  For those employees who received no payment for their private use fuel, the amount of the fuel benefit is Nil by virtue of section 151.  For those employees who did (inadvertently) receive payment for some private use fuel, the amount of the fuel benefit is calculated according to section 150.  The mileage allowance payments do not constitute AMAPs within section 229, because the cars were “company vehicles” within section 236(2) and thus excluded by section 229(4), and so the relief afforded to AMAPs by section 229(1) is not available.  The cash payments of mileage allowances constituted emoluments and thus earnings of the employees (section 62). The Tribunal notes that HMRC have agreed that the taxable amount of the mileage allowances can be reduced by the “advisory fuel rates”.  The taxable amount of the mileage allowances cannot be further reduced by reference to the lease rentals paid by the employees.  
45. The Tribunal has some sympathy with the Appellants.  The car arrangements were straightforward and there has never been any challenge to their genuineness.  The Employer’s procedures had been followed as intended, with the exception of the admitted slip-up over payments for certain home-to-work travel.  The lease payments were a real cost to the employees and the employees bought their own fuel and (again with the inadvertent exceptions) they bore the cost of their private use fuel.  However, for the reasons given in this decision notice, the provisions of the relevant parts of ITEPA give, in the Tribunal’s judgment, a clear answer to the questions posed by the appeals.

Decision

46. The appeals are dismissed.  The assessments listed at the beginning of this decision notice shall stand in the amounts assessed.  Liberty to the parties to apply for clarification or determination of figures.

Right of appeal to Upper Tribunal
47. Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal.  Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009/273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision.  Rule 39(5) provides that an application for permission to appeal must identity the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision and state the result the party making the application is seeking.
48. This document contains the full written reasons for the Decision.

			PETER KEMPSTER
	JUDGE
   Release Date: 18 November 2009