Gabelle Tax Analysis: When are cars provided by reason of employment?
The First-tier Tribunal decision in David John Cooper and related appeals (TC02120), which was published on 20 July 2012, looked at the circumstances under which cars can be taxed as benefits in kind.
The circumstances of the case may be familiar to many practitioners. A private trading company, Leaside Timber & Builders Merchants Limited (the Company), had a number of directors who were also partners in a partnership, Cooper Management Services (CMS), which provided administrative services to the company.
CMS provided cars and fuel to each of the partners, and the cars were available for their private use. The fees charged by CMS to the Company were sufficient to cover the costs of CMS, including the costs of providing the cars. The question was whether the cars were made available to the directors by reason of employment.
Salient facts that were referred to in the decision include:
- The cars were owned (outright or under hire purchase terms) by CMS and not by the company
- The fees charged by CMS were in excess of a commercial rate, and were determined at such a level as would cover CMS’s costs
- CMS did not have any business other than providing services to the Company
- All the partners were directors or members of a director’s family
The tribunal took the view that CMS would not have existed were it not for the existence of the company; there was no commercial rationale for CMS to provide cars to the partners since they took no active part in the running of the business of CMS; there was no commercial rationale for the Company to pay such fees to CMS; although the cars were provided by CMS, but those cars would not have been provided were it not for the fact that the individuals were directors of the Company.
The Tribunal recognised that there is a level of double taxation since the individuals have an income tax liability on their share of the adjusted profits from CMS but also under the benefit in kind provisions, but that this arises “because the parties concerned have voluntarily chosen, upon advice, to arrange their affairs in a particular way. They have to live with the consequence of that.”
The taxpayers tried to argue that any income tax charge under the benefit in kind provisions should be reduced by virtue of the “offset” provisions in s 132 and s 144 ITEPA 2003, by claiming that the amounts left in the partnership should be treated as contributions or payments for the use of the car. However the Tribunal disagreed, as in no sense do the amounts that the individuals “are required to pay” relate to payments for the use of the car or to make good the expense of the provision of fuel.
What does this decision mean?
Practitioners should take extreme care whenever their clients enter into a structure that purports to circumvent the benefit in kind rules for company cars. HMRC will always seek to protect their position whenever the benefit charge on cars is challenged.