The two directors of a haulage company have won a tribunal appeal against HMRC’s claim that they had not paid the correct income tax on the use of leased company cars and the use of fuel cards, after the judge ruled payments from the directors’ loan account should be taken into consideration
The case concerned Paul Harrison and Lee Solway who were directors of Harrison Solway Logistics Ltd (HSL). They appealed against HMRC’s decision that for the tax years 2010-11 to 2013-14 cars leased by the directors were company cars under s. 114(1), ITEPA 2003 and company fuel cards given to the directors were taxable as benefits under s. 150 ITEPA 2003. [Paul Harrison, Lee Solway, Harrison Solway Logistics Ltd and Her Majesty’s Revenue and Customs, TC06956].
The company also appealed against HMRC’s decision that Class 1A NICs charges were due on the provision of the car and fuel benefits and penalties for its failure to deliver returns of benefits provided by it to the directors.
HMRC contended that cars were made available to the directors by reason of their employment and without any transfer of the property in them and they were available for private use, and so s. 114(1), ITEPA 2003 applied.
Since company fuel cards were given to the directors who did not reimburse HSL, benefits therefore arose under s. 150 - 153, ITEPA 2003. HMRC also claimed a Class 1A NIC charge was due on HSL on the provision of car and fuel benefits.
HMRC submitted that there was no transfer of proprietary interest in the cars as it was HSL which entered into leasing agreements and there could be no de facto lease between the company and the directors, because the cars always remained the property of the lessor.
The lease agreements seen by HMRC precluded the transfer of agreements to anyone else without the consent of the lessor, and there was no evidence that any such transfer had been sanctioned. HSL had also not imposed any requirement on the directors to pay for private use.
HMRC argued that R & C Commrs v Apollo Fuels Ltd & Ors [2014] BTC 510 was not in point in this case as in Apollo there was a lease from the employer to the employees on normal commercial terms. In contrast, in this case HSL could not transfer the property in the vehicles to the directors because it was prohibited from doing so. Nor had the directors or HSL produced sufficient evidence to show that the directors paid full market value for the cars.
HMRC argued that the directors had omitted benefits in kind from their returns and that their behaviour was deliberate so that s. 29(1) and (4) TMA was satisfied. The tax authority disagreed that the appellants took reasonable care because they were acting on the professional advice of their agents.
HMRC had taken into account that the appellants claimed they were badly advised by their advisers, but these circumstances were not special, in that they were not uncommon or exceptional.
Directors’ loan accounts
For their part, the directors argued that the arrangements made in this case followed that in Apollo. In HSL’s view there was both an oral and de facto implied arrangement between the company and directors in respect of the vehicles leased by HSL. Accordingly, property had passed to the directors so that s. 114(1)(a), ITEPA 2003 was not satisfied.
All costs in respect of the vehicles had been borne by the directors through their directors’ loan accounts, so there had been no provision of a benefit in kind either below market value or for nil consideration.
Amendments to s. 114 made by FA 2016 indicated that HMRC accepted that ‘fair bargain’ arrangements were not within s. 114 before then as determined in Apollo.
As to the car fuel claim, this falls away if no charge arises on provision of the cars, but in any event, Harrison and Solway argued, all fuel costs were effectively met privately by use of directors’ loan accounts or by ‘making good’ to HMRC.
The directors received no overall financial benefit having met the full cost of the vehicles on commercially available terms. Debits on an overdrawn loan account represent payments as the loan account represents an enforceable debt and was not different to any other loan.
As to the absence of a written lease agreement between HSL and its directors, which HMRC pointed to as distinguishing the facts in this case from those in Apollo, the directors argued that it is was a tenet in English contract law that the terms could be written, oral or implied. It was always the stated intention of the directors that title would pass to them and this supplanted the lease between the company and the lessor. This was evidenced by the passing on of all costs to the directors and the lack of any VAT reclaim by HSL in respect of the lease costs.
Harrison and Solway argued that as there was no liability there was no tax chargeable and there could not be any penalties. If there was tax due, then the directors took reasonable care to make accurate returns. They did not act deliberately, but on the advice of their previous advisers.
The FTT held that they could not read the decision in Apollo as confined to arrangements which amounted to hiring of goods.
The judge said he could see no reason for not taking the directors’ loan accounts debits into account. Those debits were the amounts of the hire purchase and rental payments made by HSL to the leasing companies.
By acknowledging the obligation to pay the company these amounts through the directors’ loan accounts the directors were paying for precisely what HSL was able to give them and had itself paid for, the right to use the vehicles for whatever they wished whether for HSL’s business or for their own private purposes.
There was no benefit to them in the arrangements and so s. 114, ITEPA 2003 did not apply to the provision of cars to the directors.
As there was nothing to be charged to income tax in relation to cars and fuel, the assessments and interest fell away. However, the FTT held that penalties on the company for failing to file a P11D(b) in time to HMRC from benefits accruing to the directors from BUPA subscriptions etc, under reg. 81(2) SSCR did apply.
With regard to NICs, the FTT found that Class 1A NICs should have been charged in respect of benefits other than car and fuel benefits.
Thus, the income tax appeals were allowed and the NICs appeals were allowed in part.
Julie Clift, Croner-i tax writer, said: ‘The Court of Appeal in Apollo held that a tax charge could only arise if the terms on which the car was leased to an employee conferred a “benefit”.
‘Changes made by FA 2016 override this decision so that, s. 114(1A) confirms that in determining whether the rules apply to a car or van it is immaterial whether, or not, the terms on which the car or van is made available constitute a fair bargain.
‘However, FA 2016 is not retrospective so the changes were irrelevant in this case and a fair bargain nullified the charge under s. 114.’
Report by Pat Sweet
