Andy Keates investigates a case where the directors were provided with company cars and fuel but were judged not to have received a benefit, so no tax or class 1A NIC was due.
If a company provides a car to a director for private use, this will normally generate a taxable benefit and a class 1A NIC liability. The case of Harrison Solway Logistics (HSL) TC06956 proves there can be odd exceptions.
HSL is a company owned 50:50 by its two directors, Paul Harrison and Lee Solway. It entered into lease agreements with various companies who supplied cars which were driven by the directors for both business and private use.
The full cost of leasing the cars was reflected by debits in the two directors’ “loan accounts” with HSL. The full costs of a fuel card were similarly passed on to these accounts, which were perennially overdrawn.
In October 2014, HMRC proposed to charge the directors’ tax on both the car and fuel benefits (ITEPA 2003 Chapter 3 Part 6) but offered “as a concession” to treat the lease payments debited to the loan accounts as a cash contribution for private use. If the directors appealed to tribunal, that concession would be withdrawn.
In order to protect its position, HMRC issued to HSL:
- A decision under section 8 of SSCTFA charging class 1A NIC totalling just over £40,000.
- A notice of penalties under Regulation 81 of SSCR for the failure to make a return of Class 1A NIC. This included penalties under TMA 1970 s 98A in respect of the income tax aspect of the failure and totalled £691,566.
HMRC issued the directors with income tax assessments under TMA 1970 s29 for the years 2010/11 to 2013/14 and penalties under FA 2007 Sch 24 for submitting incorrect tax returns. HMRC asserted that the omissions of car and fuel benefits were deliberate and that any disclosure was prompted.
Was there a benefit?
The FTT first considered whether there was actually a taxable car benefit. This hinged upon the Court of Appeal’s judgment in Apollo Fuels  EWCA Civ 157, which held that there can be no “taxable benefit” in situations where the employee does not derive any benefit in the general sense of the word. In Apollo, the company leased cars to its employees on terms which were no more favourable than those it offered to the general public: the employees received no more than a fair bargain.
The Apollo ruling was not allowed to survive for long. From 2016/17 taxable benefits arise from the provision of accommodation, cars, vans and fuel, even in situations where fair bargain applies.
Happily for HSL, the years under consideration fell before 6 April 2016, and the judge was able to consider the matter under Apollo terms. Since the directors were picking up the full cost of leasing the vehicles, they were deriving no benefit from their employment.
The fact that the directors’ loan accounts were overdrawn was, in the judge’s view, irrelevant. Debiting the costs to the account established a debt to the company sufficient to satisfy him that the directors were incurring the cost.
Private use payments?
If there had been a benefit, the judge would not have allowed the loan account debits to stand as “payments for private use”. For that to have applied, there would have needed to be some evidence that the charges were made:
- Specifically for the private use of the car; and
- As a condition of the car being made available for private use (ITEPA 2003, s.144)
The directors derived no benefit from fuel for private mileage since the full cost of their fuel cards was debited to their loan accounts. In any event, a car fuel benefit can only be charged if a car benefit applies.
There were no inaccuracies in the personal tax returns, so the penalties charged on the directors must fall. Even if the returns had been incorrect, “the directors were not careless in making their returns… We add that HMRC came nowhere near demonstrating to us that their actions were deliberate.”
The penalties charged on the company do not require carelessness or deliberate error in order to be valid. They must stand, but must be reduced to the amount of Class 1A NIC due for the year.
This case is mainly one for the archives since the changes in ITEPA 2003 effective from 2016/17 mean that no future leasing arrangements will succeed in escaping a car benefit charge. However, there may still be some open cases on which it will impact.
Once again, Judge Richard Thomas found much scope for criticism of HMRC’s assessing practices.