With the ever-increasing levels of income tax being charged on the company car, employers are seeking out ways of providing cars to their employees without any benefit-in-kind tax arising.
The much-used route of ECO schemes is no longer offered by many lessors. These schemes require a degree of compliance with the FCA rules which cannot be accommodated by many of the former providers. The other alternative of salary sacrifice was outlawed in April 2017 (except for ultra-low emission cars).
So we are seeing a growing number of lessors offering Personal Contract Hire (PCH) or Personal Contract Purchase (PCP), and suggesting this as the answer to the problem. In fact, a Fleet News report for the recent FN50 event suggested lessors had maintained volumes of leases thanks to the growth in interest in PCH/PCP arrangements, and there was particular success in selling into the SME market.
‘Significant tax problems’
However, there are significant tax problems for corporates using PCH/PCP that are being ignored.
For tax purposes, the vehicle is considered a company car because the ‘title’ does not transfer at the outset of the agreement. The legislation brings it back into being a company car if the arrangement is deemed to be by ‘reason of employment’ (see S116 ITEPA 2003).
‘Reason of employment’ is a wide test. It covers whether any special terms are available to the employee or if the scheme is underwritten or supported by the employer.
In some cases, lessors are permitting employees entering into these agreements to use discount terms agreed by the employer with a car manufacturer and historically used for the company car fleet. That clearly is not acceptable and would leave the vehicle in question to be a company car.
But to be clear, these arrangements would not be a problem if a lessor was allowing employees to enter into a scheme using PCH/PCP where there were no special terms or support. Clearly, such a scheme may be of limited interest. If this is the case it would likely be no cheaper than that available in the general marketplace.
Sadly, I am seeing a lot of selling of PCH/PCP schemes that give special terms or support which are flawed. We have seen a significant number of challenges of these types of schemes by HMRC over the years with some sizeable settlements having to be made by employers.
Criminal Finance Act ramifications
The difficulty for those selling these schemes is that they may now fall foul of the new Criminal Finance Act, which could lead to those involved facing criminal charges. These rules came into use on 30 September 2017 and target deliberate and dishonest behaviour performed by an employee, consultant or agent of a partnership or limited company.
The rules are widely drafted. So even if the management of the company or partnership were not aware of the error it would not remove them from a charge. They could be excused prosecution if they could demonstrate to HMRC that they have undertaken a risk assessment and had robust procedures to identify risk but the particular failing fell through the net.
If a leasing company is offering to employees of a customer the opportunity to acquire vehicles on either a PCH or PCP arrangement when that arrangement is clearly by reason of employment could be considered a deliberate attempt to avoid income tax and caught by the Act. At present we do not know the level HMRC will be using these powers and whether it will target things like car arrangements.
Employers sold a scheme by a third party which was in breach of the rules or approached with a view to entering into such a scheme are required by law to report this to HMRC or face action for not doing so.
So the message is an old one: you need to exercise care because anything that glitters may not be gold. Employers and lessors need to take the appropriate tax/ legal advice and exercise care when they are tempted to enter into any quest to save income tax that they do not fall foul of the rules.
About Alastair Kendrick
Alastair is a leading expert on employment tax and also international fleet issues. He does have considerable experience of all aspects of company car taxation. He is still heavily involved in issues relating to employee car ownership schemes and salary sacrifice.