Lease Cars Equals Company Cars

A recent ruling in the UK Upper Tribunal appears to have given rise to a change in the way that companies providing cars through lease agreements may have to treat these in the future.

In very short detail, the case of Apollo Fuels Ltd & Others v HMRC involved the employer leasing cars to some of its employees.  The rental that was paid by the employees was the same through this arrangement as if they had entered into the lease agreement themselves.  There was no financial gain to the employee – simply, the lease agreement was between employer and supplier and there were no restrictions in place on how the vehicle could be used.  On entering the agreement for the lease car, the employee was reimbursed mileage at the rate applicable for other employees who used their own car for business use, i.e. the 45p for the first 10,000 miles.  The company did not make any declaration on the P11D indicating that employees were in receipt of a company car.

HMRC argued, however, that the arrangement still rendered the car to be treated as the provision of a company car (under Chapter 6, part 114 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)).  Further, they argued that the mileage payments should be subject to National Insurance Contributions (NICs).  The First-Tier Tribunal decided in 2012 that the provision of cars in this way did not render them company cars and that the payments made in respect of the mileage were not subject to NICs.  HMRC appealed against this decision and the case was heard in the Upper Tribunal in February 2014.  The issues raised by the appeal were:

• Do the arrangements for leasing cars to employees render them to be treated as company cars and, therefore, there is a liability for tax and NICs via the P11D?
• Are the mileage payments exempt from liability because they fall under the exemption in Section 229 ITEPA (i.e. the 45p exemption)?

It was clear that, should the Upper Tribunal rule in favour of HMRC, the lease cars would have to be treated as company cars.  Also, any mileage payment paid at the rate applicable for personal cars used for business would have to be subject to tax and NICs on the portion that above HMRC’s Advisory Fuel Rates.  However, the Tribunal dismissed HMRC’s appeal.  They ruled that, as the full lease market value was being paid, there was no benefit and no earnings or profit (the ruling would have been different if there had been a financial gain by the employee).  In addition, Section 114 (3) of ITEPA disqualifies the leased car from being treated as a company car.  Referring to Chapter 6 re company cars, Section 114 (3) says:

This Chapter does not apply if an amount constitutes earnings from the employment in respect of the benefit of the car or van by virtue of any other provision

Essentially, ITEPA said that a car provided by a lease arrangement constituted an ‘other provision’, therefore, the car was not a company car.  Following on from this and the mileage allowances, the Tribunal ruled that, seeing as the car was not a company car, the mileage reimbursement rate was correct and, therefore, the exemption in ITEPA 229 applies (the 45p per mile exemption).

Following the above ruling, let’s fast forward to the Budget 2014 and the Finance Bill 2014 documents that have just been published.  The pivotal Section 114 (3) in the Apollo case is being repealed, effective 06 April 2014.

Comment So, Section 114 (3) is repealed from 06 April 2014.  This means that a car, regardless of how it is provided by the employer, is now to be treated as a company car.  Any car arrangement that might have existed using Section 114 (3) to exclude it from having to be treated as a company car is void from 14/15 tax year. This does seem a bit of an extreme reaction to the Apollo case.  Section 114 (3) allowed a car to be provided under a lease agreement without it having to be treated as a company car.  Now, the removal of the Section means that employers have to consider such lease agreements and declare them on the P11D.  It seems as though the Government regarded 114 (3) as a ‘loophole’ and the simplest thing was to repeal it altogether.  However, isn’t the Government always concerned that the tax system is fair – just using the Apollo case as an example, where lease amounts were paid at the market rate and there was no financial gain or benefit to the employee, is it fair that there is a reporting and benefit consideration when, in fact, there is no benefit? What do employers do?  The simplest thing would seem to be to facilitate the lease agreement but ensure that the arrangement is between the employee and the lease company.  In this way, the employer has not in any way ‘made available’ a car to the employee.  Or, do we declare the lease payments as ‘Deductions for payments for private use’ (Section 144 ITEPA)?  In this way, at least the benefit calculation is reduced. We look forward to more guidance on this from HMRC but as it stands, and as we interpret it, another administration burden is place on the employer in the name of perceived tax and NICs avoidance.

Further Information

• Legislation – ITEPA 2003
• Tribunals.gov.UK – HMRC v Apollo Fuels Ltd and Others
• Parliament.UK – Finance Bill 2014 (part 2, page 24)