HMRC is not entitled to charge income tax for employees of a fuel supplier that leased cars from their employee at their market value in an "arms length" arrangement, the Court of Appeal has ruled.
The Court of Appeal [case number: A3/2014/1326, Apollo Fuels Ltd & Ors v HMRC] agreed with a decision in 2014 by the upper tribunal that the leased cars were not a taxable benefit and therefore the employees shouldn't pay income tax on them.
Apollo Fuels – a group of companies in industries including fuel oils and transport contracting - arranged leases for some of its employees. It paid the cost of the rental and was re-paid by employees.
Because the companies believed that the provision of the cars was not a taxable benefit, they did not deduct the tax that HMRC claims is be due from employees’ pay under the PAYE scheme, or notify HMRC that cars were being provided to the employees under the leases.
In the first and upper tribunals, HMRC argued that cars should be subject to normal car benefit rules.
Apollo argued that the payment by the company of the lease rentals was earnings, which were covered by employees, and that this gave a nil result for tax and national insurance.
The Court of Appeal focused on whether an employee is liable to income tax in respect of a car leased to him by his employer on arm's length commercial terms, including lease charges at full market value.
HMRC argued that although the employees do not get any financial benefit from the lease and pay a full price for them through leasing charges they are still liable for income tax under Chapter 6 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003. The "cash equivalent" of the leased car, calculated in accordance with chapter 6, should be be treated as part of the employee's earnings chargeable to income tax, HMRC argued.
The Court of Appeal ruled that employees had not received any benefit in the "ordinary sense" of the word.
Although HMRC closed down the use of this type of company car scheme in 2014, confirmation by the Court of Appeal that employees should not be taxed for something bought from their employers at the market price will affect lots of businesses.