A car leasing arrangement between an employer and its employee was considered a taxable benefit for the employee.

This test case concerns the taxability of car arrangements between an employer and its employees.

The taxpayers, in common with other employees, entered into car leasing arrangements with the employer. The lease terms were arm's length and there was no restriction on the use of the cars. The employees were entitled to claim mileage allowances in respect of business mileage only at the approved rates. Mileage logs were kept to support the claims.

Following a PAYE audit, HMRC formed the view that the cars gave rise to a taxable benefit, the fuel and mileage allowance also gave rise to further taxable benefits, some mileage payments had covered private mileage as they related to home-to-work travel and this all had National Insurance consequences for the employer.

The taxpayers disputed that the car was not “made available to an employee” as required for a car benefit to arise under section 144 ITEPA 2003. Rather they acquired the use of the car pursuant to the car lease. HMRC submitted that “made available” should bear the ordinary meaning of “capable of use”. If the employee does not own the car but has permission to use the car then the car is within section 114. The Court drew from the decision of the High Court in the case of Christensen v Vasili [2004] STC 93 in considering the words “made available”. In that case, a co-ownership arrangement between and employer and employee was considered to be insufficient to prevent the car from being ‘made available’. The Court decided that if that was the case for co-ownership then it must also be the case for a lessor/lessee relationship.

The Court therefore held that the cars fell within section 114 and the cash equivalent of the car benefit is taxable as earnings by virtue of section 120. However during negotiations leading up to the assessments, HMRC had accepted that a deduction under section 144 was available by reference to the car lease rentals paid by the employee but that the benefit could only be reduced to nil and no further. The Court, in its findings, noted the agreement between HMRC and the taxpayer that allowed for a deduction of the lease rentals paid by the employee.

Considering the mileage allowance that was paid to the employees, the Court held that a fuel benefit arose; however, amounts paid in respect of business mileage were not taxed. For employees who received payment for some private use, the amount of the fuel benefit was calculated in accordance with section 150. Such mileage payments fell outside the “approved mileage allowance payments” (AMAPs) because the cars were company cars within section 236(2). Therefore the payments of mileage allowance constituted emoluments and thus earnings of the employee. HMRC agreed that the taxable amount could be reduced by the “advisory fuel rates” and a further reduction for the lease rentals paid by the employees.

The full text of the case can be downloaded from http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j4617/TC00255.doc