Share this content
Opening car door
istock_opening-car-door_LanaStock

Full reimbursement didn’t cancel car benefit

by

Directors reimbursed their employer in full for the cost of leased cars, but HMRC successfully argued at first tier tribunal that this did not remove the benefit in kind charges.

23rd Nov 2021
Share this content

The case of Smallman & Sons Ltd (TC08242) considered whether a benefit in kind charge can arise where an employee fully reimburses their employer for the cost of the car made available to them.

Background

Smallman & Sons Limited (SSL) was the subject of a routine compliance review by HMRC in April 2016. The final outstanding issue was the provision of four cars to two directors and their daughter.

SSL paid the lease costs for these cars but the full cost was reimbursed by the directors via their directors’ loan accounts. These accounts were always in credit throughout the period under consideration.

The reason the transactions were structured this way was that that SSL had a good relationship with the dealer and so was charged a lower lease cost than would have been available to the directors personally.

HMRC’s assessments

HMRC’s view was that these cars attracted benefit in kind charges. HMRC assessed SSL for Class 1A NIC of £45,518 for the six years to 5 April 2017. Penalties of £7,318.60 were also charged for the same period. The directors were assessed for five years of additional income tax totalling £90,300.01.

HMRC said it was justified in using the extended six-year time limit for raising assessments in place of the four-year limit, as it argued that SSL and the directors had been careless or deliberate in their errors on their returns.

Legislation

In brief, to attract a benefit in kind charge, a car must be made available for private use, for an employee or member of their family/household, by reason of the employment (ss.114-120 ITEPA 2003).

The arguments

SSL argued that it was acting purely as an agent between the car dealer and the directors and was thus not the one making the cars available to the directors. If you bought a car using a cheque, no-one would claim the bank was making the car available, SSL argued.

SSL further argued that up until the legislation was reworded with effect from 5 April 2016, a “benefit in the ordinary sense of the word” had to arise in order to create a tax charge. The directors were reimbursing the full cost of the lease, so where was the benefit?

Register for free to continue reading

It’s 100% free and provides unlimited access to the latest accounting news, advice and insight every day. As well as access to this exclusive article, you can:


Content lock down, tick icon

View all AccountingWEB content


Content lock down, tick icon

Comment on articles


Content lock down, tick icon

Watch our digital shows and more

Access content now

Already have an account?

Replies (17)

Please login or register to join the discussion.

avatar
By Paul Crowley
23rd Nov 2021 21:21

I read this in Taxation Magazine
I sympathise with the taxpayers and their advisors
There are numerous similar situations where the group factor around the company gives rise to a discount for bulk and admin reduction for the provider of the benefit.
My thoughts went straight to private medical
Employees regularly contribute (reimburse from after tax salary) for family members, so the company only pays for the employee.
In this case just directors and daughter
But no reason why the principle could not stretch to the entire workforce

Thanks (1)
Replying to Paul Crowley:
avatar
By Rammstein1
24th Nov 2021 08:25

It would have been interesting to see who paid for the insurance, repairs, breakdown cover, etc. Who's name was the insurance in, the company or the directors? There is a lot more to a company car than the more straight forward medical benefits.

Thanks (2)
Replying to Rammstein1:
avatar
By Paul Crowley
25th Nov 2021 13:01

Cannot believe the advisors would leave in the motor expenses costs that related to these vehicles
If so they were idiots

Thanks (0)
Replying to Rammstein1:
avatar
By Paul Crowley
25th Nov 2021 13:05

Cannot believe the advisors would leave in the motor expenses costs that related to these vehicles
If so they were idiots
They did claim as such

he submitted that the principle set out in the Apollo Fuels decision would apply here to
all periods up to 5 April 2016 because all the costs of acquiring and running the cars were
simply recharged to BG and LG, meaning that there was nothing that could be regarded as a
“benefit” to them.

Thanks (0)
avatar
By AK Employment Tax Services
24th Nov 2021 08:56

The tax rules single out a different test when it comes to a vehicle to other assets provided. The legislation looks at whether title to the vehicle transferred and if not whether the arrangement could be seen to be by reason of employment. This case highlights the difficulty of demonstrating the arrangement is not by reason of employment

This is a good reminder to those who are tempted into similar types of arrangement or have been persuaded through their employer to take a car on some sort of PCH leasing arrangement. We have seen these arrangements challenged over the years but they are still being sold

Thanks (0)
avatar
By petestar1969
24th Nov 2021 11:06

First off it sounded like a p*sstake by HMRC and the client was unlucky. The more I read the more I got the feeling the accountants messed up.

Thanks (0)
avatar
By raycad
24th Nov 2021 11:36

The finger of blame must surely point at the advisers in this case. I haven't read the full case report but on the face of it they appear to have paid little or no regard to the two leading FTT cases on this topic, namely Whitby & Ball v HMRC and Stanford Management Services Ltd v HMRC. Both are summarised at EIM 23215, link here:

http://www.hmrc.gov.uk/manuals/eimanual/eim23215.htm

Okay, FTT cases are not binding, per se, but they show which way the wind is blowing. In fact the outcome in the Smallman case was much, much worse because in those two other cases HMRC accepted that the DLA debits could be treated as tantamount to private use contributions, despite clearly failing the strict conditions for p/u payments to be deducted in calculating the scale charge.

The attempt by HMRC to categorise the Smallman case as careless or deliberate was clearly a step too far but getting tax and Class 1A NICs on the car scale charges for the in-date years was a gaping open goal for them. As we all know all too well, tax and fairness do not go hand-in-hand!

Thanks (1)
Replying to raycad:
avatar
By HarryB
24th Nov 2021 13:46

That's an interesting link.....

But this is where HMRC annoy me. If you ever try to argue that a FTT decision is relevant (I've had this with ATED and other appeals), you are simply told that FFT decisions are not binding - which we all know is true. But my experience is that in arguing with HMRC, they refuse to even consider a FTT decision that does not support their view.
But in this instance, in EIM23215 HMRC quote the 2 decided cases in their favour as if they set a precedent. They should not have it both ways - but they can, because they can spend years arguing the toss without worrying about the cost or time involved.

Thanks (4)
Replying to HarryB:
avatar
By raycad
24th Nov 2021 14:17

Couldn't agree more, Harry B. It has ever been thus! That said, it's a bit of a dangerous precedent, isn't it, when both cases show that HMRC were prepared to "look the other way" on the p/u contributions aspect. Which they evidently weren't prepared to follow in the Smallman case. I'll read the case report in full when I have more time to see if this point was even raised.

Thanks (0)
Replying to HarryB:
avatar
By raycad
24th Nov 2021 14:17

Couldn't agree more, Harry B. It has ever been thus! That said, it's a bit of a dangerous precedent, isn't it, when both cases show that HMRC were prepared to "look the other way" on the p/u contributions aspect. Which they evidently weren't prepared to follow in the Smallman case. I'll read the case report in full when I have more time to see if this point was even raised.

Thanks (0)
Replying to raycad:
avatar
By philaccountant
24th Nov 2021 13:59

I wouldn't be so quick to blame the advisers. It's more likely the client turned up at the year end with new cars and said "sort this all out".

Thanks (3)
Replying to philaccountant:
avatar
By gillybean04
24th Nov 2021 20:17

At which point they surely should have raised it as an issue.

It actually seemed to be in consideration that because the full details of the arrangements were known to their accountants, whom the company and directors relied upon to make their returns and who had raised no issue with the treatment of the vehicles, that they weren't careless.

Thanks (0)
avatar
By Munch
25th Nov 2021 12:09

This was never going to work. HMRC will see the car as a benefit and the transactions over directors loan accounts as separate transactions. There was no transfer of ownership. Advisors should have called it out. Hopefully the company and directors will come to a sensible arrangement to deal with the net cost to all concerned and learn a lesson. Always ask advisors to give a risk analysis with any "clever" scheme.

Thanks (0)
Replying to Munch:
avatar
By Roland195
25th Nov 2021 12:54

Munch wrote:

Always ask advisors to give a risk analysis with any "clever" scheme.

I don't imagine that this was so much a clever scheme as in an attempt at damage limitation when the new cars came to light at the year end and presumably after the P11d filing date and come & gone. The advisors most likely did call it out, but were pressed to find a solution by the client of which this was it - there but for the grace of God.

Thanks (0)
Replying to Roland195:
avatar
By Paul Crowley
25th Nov 2021 13:46

+1
Clients do daft things
Thereafter it is damage limitation

Thanks (0)
avatar
By djn
25th Nov 2021 15:35

Surely if this has happened then the company would then claim back the VAT on lease and corporation tax on the lease payments etc? Then the dla's would need to be amended.
What a mess and I am surprised by the outcome in honesty.

Thanks (0)
Replying to djn:
avatar
By Paul Crowley
25th Nov 2021 16:25

Year one is probably when the calculation of Car benefit charge shocked the clients and they wanted to fix the problem.

Thanks (0)