Cars And Benefits-In-Kind: New Rules Explained

Mike Truman looks at the new rules on when a car is provided as a benefit-in–kind for employment income purposes.

Benefits-in-kind. The clue is in the name, isn’t it? Rather than being paid cash, you are given something other than cash that is of benefit to you. Benefits-in-kind used to be known as ‘perks’, from the word ‘perquisites’, defined by the Oxford Dictionaries as ‘A benefit which one enjoys or is entitled to on account of one’s job or position’.

Inevitably this means that they are often taxable. The normal starting point, in ITEPA 2003, is that s 62 charges ‘any incidental benefit of any kind obtained by the employee if it is money or money’s worth’. So give an employee something that can be sold, and he or she is at least taxable on the second-hand value of it. That is then supplemented, and in most cases supplanted, by over 100 sections following s 62 that provide for benefits to be taxed either under specific regimes (such as company cars being taxed by reference to their carbon dioxide emissions) or under the general rule in s 203 where tax is due on the cost to the employer of providing the benefit.

The rules for car benefits have been particularly problematic for employers. The days when a company car was a ‘perk’ are long gone for most employees; except for the most fuel-efficient cars the benefit-in-kind charge is based on an amount far higher than the real benefit that the employee gets from it. It has become more common for employees to buy their own cars and claim back a mileage allowance from the employer. But employees then miss out on the buying power and freedom from hassle given by employer fleet management, and employers fear that the employees will not buy cars that project the right image when they visit clients.

So an alternative approach has been for the employer to be responsible for a fleet of cars that are leased to the employees. The employee has a commercially calculated, all-inclusive, lease payment to include servicing, repairs, etc., deducted directly from net pay, and pays for fuel. The employer reimburses the employee at the HMRC approved rates for the business mileage the employee reports. The net result will normally be much less expensive for the employee than having a company car and the accompanying benefit-in-kind charge.

Unfortunately, HMRC did not like this approach, and challenged it in a case, Apollo Fuels v HMRC [2016] EWCA Civ 157. The history of this case is unusual, in that the taxpayer won all the way through the courts, but for different reasons at each stage. HMRC’s argument was that the benefit-in-kind legislation only required the employer to have provided the car by reason of the employment without a transfer of the property in it for the company car rules to bite. The First-tier Tribunal held that the lease gave the employee some ownership rights, so there was a transfer of the property in the car, and hence no benefit-in-kind charge. The Upper Tribunal disagreed, but said the company car rules were displaced by a charge under s 62 on zero. The Court of Appeal, which is where the case has recently been decided, held that the arrangements were commercial and did not, on a purposive construction, give rise to a benefit-in-kind at all.

While the taxpayer has therefore succeeded three times, the victory has been pyrrhic. Finance Bill 2016 includes provisions to prevent such arguments from succeeding in 2016/17 and subsequent years. The legislation (Clause 7 of the Bill) affects living accommodation, company cars or vans, and loans. In all three areas wording about ‘fair bargain’ is introduced in similar terms. For cars and vans it says:

‘In determining for the purposes of this Chapter whether this Chapter applies by virtue of subsection (1) to a car or van made available to an individual it is immaterial whether or not the terms on which the car or van is made available constitute a fair bargain’

For cars and vans there is an additional provision to deal with any argument that the vehicle is provided for reasons other than employment. This provision deems any car or van that an employer provides to an employee (or member of their family) to have been made available by reason of the employment except in two situations. The first is where the employer is an individual and the vehicle is provided in the normal course of domestic, personal or family relationships, and the second is where the employer runs a vehicle hire business and the vehicle is provided to the employee as a normal member of the public. 

So any future Apollo Fuels type of scheme will be caught because the employer is ‘providing’ the car, and cannot argue that this is not because of the employment relationship. The first of the only two exceptions will be when, for example, a father employs his daughter in the business, and separately lets her have a car that she can use because she is his daughter. If the daughter is in a job where all the employees get cars, the exception will not apply.

The other exception will require the employer to be running a car hire business, but it will not be possible to argue that the company fleet of leased cars is such a business. In order to meet the rules for the exception, not only would the vehicles have to be made available to the public for hire, they would also have to be hired by the employee acting as an ordinary member of the public. In other words, an employee of a genuine car hire company does not have to go to a competitor to hire a car when he needs one for a few months for fear of triggering a benefit-in-kind charge if he hires one from his employer, but a car hire company cannot use the exception to set up an Apollo Fuels type scheme for its employees.

A further change was recently introduced by an amendment, to provide that even when the benefit-in-kind cash equivalent is calculated as nil (presumably because the employee is making a contribution that equals or exceeds the benefit in kind charge), this is still treated as taxable earnings. As a result, there will still be a benefit in kind charge on free fuel provided by the employer (the fuel charge is dependent on the car being charged as a benefit).

Whether Apollo Fuels will now be appealed by HMRC is open to question, but the point is put beyond doubt for the current year onwards; employers will no longer be able to arrange for employees to lease their cars through a company scheme. That does not, of course, prevent employees from making their own arrangements, and it seems that a special rate negotiated with a leasing company by an employer could not be challenged, as the company would not be providing the car.