EIM23910 - Special cases: issues relating to Apollo Fuels judgment

Introduction

The decision in the 'Apollo Fuels' case was handed down by the Court of Appeal on 17 March 2016. The Court of Appeal has concluded that a benefit in its ordinary sense has to exist before Chapter 6 applies (Chapter 6 is the shorthand for Chapter 6, Part 3 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) - the chapter that contains the legislation for car benefits-in-kind). The case is now final and any issues that arise out of 'Apollo' will need to be managed through legislation and guidance.

The government has announced changes to the company car, provided living accommodation and loan benefit in kind legislation in Budget 2016 effective from 6 April 2016. These changes ensure that the relevant benefit in kind legislation applies in the way we have always thought it applies from that date.

This guidance specifically provides information on HMRC’s view of the judgment and its advice to compliance staff about how to handle open enquiry cases up to and including tax year 2015 to 2016 where the 'Apollo Fuels' judgment could be in point. This guidance covers both cars and vans, but we will only refer to cars in the examples that are used.

Please note, a benefit in the ordinary sense of the word is not the same thing as a benefit-in-kind for tax purposes and it's important to not get the 2 concepts confused. A benefit in the ordinary sense is something that provides the employee with special bounty. A benefit-in-kind is something provided to the employee that falls within the benefits code in Part 3 ITEPA. The 'Apollo Fuels' judgment tells us that up to 5 April 2016 we first need to establish if there is any benefit in the ordinary sense of the word and only if there is do we then refer to Chapter 6 to work out the cash equivalent of the benefit in kind.

This guidance applies to open company car enquiries up to and including tax year 2015 to 2016 only.

1    HMRC’s interpretation of Apollo Fuels

A key part of the 'Apollo Fuels' judgment was Richards LJ conclusion (paragraph 73) where he considers the question of whether a car benefit applies:

“For all these reasons, I conclude that the Upper Tribunal and First Tier Tribunal were right to decide that a charge to Income Tax arises under Chapter 6 only if the terms on which a car is leased to an employee confer a benefit on the employee in the ordinary sense of the word. The employees in this case received no such benefit.”

It's important to remember that a “benefit on the employee in the ordinary sense of the word” is not the same as a benefit in kind. This is the conclusion in the recent case of Fowler v HMRC (2016) TC05095 - First-tier Tribunal - where it was noted (paragraph 45) that 'Apollo' means that
“the car benefit code [for those years] is subject to an overriding principle that there must in fact be a benefit to the employee and if the employee has paid a market rate for the asset made available, there is no charge irrespective of whether there is a cash equivalent under Chapter 6. We therefore [first] need to consider that question.”

This is also our understanding of the judgment. Broadly we interpret the 'Apollo' judgment as meaning:

• if the actual value of the arm’s length “benefit” within the ordinary sense of the word “benefit” is less than or equal to the amount paid by the employee or director there is no “benefit” in the ordinary sense of the word and Chapter 6 will not apply.
  By actual value of the arm’s length “benefit” we mean, for example, the value of a lease made at market value with an unconnected third party on commercial terms and in the same way as a deal made by any member of the public (described in the rest of this document as arm’s length market value).
• another way of considering this is where the hire cost (at arm’s length market value) paid to the employer (for having the specific car available to the employee at all times) is greater than or equal to the 'actual value' of the benefit in the ordinary sense of the word.
  This can be illustrated by the following comparison. Where “V” is the arm’s length market value and “A” is the amount paid by the employee or director, then if:

V is higher than A there is a benefit

V is the same as or less than A there is no benefit

The value “V” of the arm’s length market value is a question of fact. We would expect the employer to demonstrate that V is lower than or equal to the amount paid by the employee (“A”). If they are unable to demonstrate this, then there is a benefit in the ordinary sense of the word and the usual benefit in kind rules for company cars will then apply for those years.

How should I establish V?

It's up to the employer to demonstrate to you that there is no benefit within the ordinary sense of the word. If you think that their explanation and evidence is reasonable you should accept there is no benefit within the ordinary sense of the word.

Leased car - establishing V

If the employer leases a car and the employee then repays the employer all payments that the employer has expended in providing the car and the employer can demonstrate that the lease repayments or interest is at a level that the employee could have obtained from the lessor then you can accept that there is no benefit within the ordinary sense of the word.

Car owned by employer - establishing V

If the car is owned by the employer and the employee pays something towards the car you'll need to establish what the arm’s length market value of the car is. If the employer claims there is no benefit in the ordinary sense of the word then you'll need to consider how he came to this conclusion and whether it's a reasonable approach.

There are 2 likely approaches an employer may take when valuing the arm’s length market value of the car:

• determining the equivalent cost of hiring the same age car 24/7 for a full year (or part year if appropriate) - this would be more likely if the car was new; or
   
• estimating the cost of the car - this would be more likely if the car was an older model. If this method is more appropriate then you'll need to consider costs of ancillary aspects associated with the provision of the car need to be taken into account in determining the arm’s length market value and whether there's a benefit. These ancillary costs will include servicing, repairs, MOT, road tax, insurance and breakdown cover etc. This list is not exhaustive and there may be others.

2   No benefit: if V is the same as or less than A

This will occur if:

• the lease between the employer and the employee is at arm’s length market value and the employer owns the car - if the employer charges hire costs at market value which the employee agrees to pay and actually pays, then there is no benefit in the ordinary sense of the word
• the employer leases a car from a third party on arm’s length terms, and the employee reimburses the employer’s lease costs - there will be no benefit in the ordinary sense of the word if the terms and cost on which the employer leases the car are at arm’s length market value
• the employer is able to demonstrate that there is no benefit in the ordinary sense of the word.

2.1    What counts as an amount paid (A)?

’A’ means any of the following:

• payment of cash (or from net pay) from employee to employer that was agreed and paid during the relevant tax year
• a private use payment or capital contribution within the meaning of the car benefit legislation at s144 ITEPA and s132 ITEPA respectively (EIM25250+ and EIM24350+). Although a private use payment or a capital contribution is a tax concept, as long as it's agreed (upfront) as part of the bargain between the employer and employee, it should just be treated as a payment from employee to employer when considering the question of whether there is a benefit within the ordinary sense of the word. This means any private use or capital  payment must be agreed upfront and paid within the tax year.
• Please note that to establish whether there's a benefit within the ordinary meaning of the word, we also need to look at any contributions that the employee has made to the person (usually the employer) providing the car. If the payment is less than the value of the provision of the car then there is a benefit within the ordinary sense of the word and we then need to apply the company car benefit rules in full and in the usual manner. At that point, any previous considerations about the meaning of benefit in the ordinary sense of the word then become irrelevant.

• a payment from a director’s loan account which is in credit and remains in credit throughout the year.

• where the monthly lease amount is debited from an overdrawn director’s loan account and the loan account is brought into credit by or before the end of the tax year and there is no indication of avoidance activity, such as bed and breakfasting, by at least an amount equal to the leasing payments.

In these cases payment (‘A’) does not mean any of the following:

• the situation where the payment was agreed and made after the end of the relevant tax year
• where the monthly lease amount is debited from an overdrawn director’s loan account and the loan account remains overdrawn at the end of the tax year - the presence of a s455 Corporation Tax Act 2010 charge on the overdrawn director’s loan account does not affect this conclusion.

2.2    The tax implications of concluding there is no benefit within the ordinary sense of the word.

If you conclude that the agreement or arrangement between the employer and employee means that there is no “benefit” within the ordinary sense of the word, the car is not a company car and therefore the following applies:

• there is no car benefit charge within Chapter 6, Part 3 ITEPA
• Approved Mileage Allowance Payments (AMAPs) can apply to any business miles travelled in the car
• there will be no fuel benefit charge, so any fuel provided by the employer will be a benefit under the general benefit rules and calculated at cost to the employer
• the exception at s239(4) ITEPA 2003 will not apply (this is explained further in in EIM23035) - therefore items such as car insurance, servicing, MOT, repairs, breakdown cover, road tax etc. will create an additional benefit-in-kind charge under Chapter 10, the cash equivalent of which will be the cost to the employer.

In the case where no benefit arises the employer will not need to report this. However, additional benefits such as those under Chapter 10 will need to be reported to HMRC in the normal way.

If there's a benefit because A is less than V then you need to follow the guidance at paragraph 3 below.

3    Benefit: V is higher than A

This will occur if:

• the car is leased to the employee by the employer or leased by the employer and as part of the agreement under which the vehicle is made available to the employee for private use the employee doesn’t pay anything, or the employee is required to pay less than the commercial rate - for example, the employer leases the car, and the employee pays the employer half the market value hire charge
• the employer has leased the car at less than the employee could have done if they were to approach the lease provider independently and lease the same car. This is not at arm’s length market value and ‘V’ will always be higher than ‘A’ if the employee pays ‘A’ to the lessor via the employer, for example. When we refer to arm’s length market value we also include in the arrangement things like interest on any finance agreement or insurance payments. All need to be equivalent to a deal made by the public with an independent leasing company or the like to be considered as truly representing ‘V’
• any situation on page 5 that isn’t a payment towards ‘V’, and so does not fall into the meaning of ‘A’ - in this case, ‘V’ will always be higher than ‘A’ because ‘A’ is not a valid payment towards ‘V’.

3.3    If there is a benefit within the ordinary sense of the word

Provided the conditions in section 114(1) ITEPA are satisfied, this will mean:

• there is a car benefit charge calculated in the normal way per s114 ITEPA 2003 onwards
• AMAPs will not apply and the usual AFR or cost rules will apply to any business miles travelled in the car where the employee has met the cost of fuel out of their own pocket
• the usual fuel benefit rules will apply
• the rules at s239(4) ITEPA 2003 will apply - these rules are explained in EIM23035.

In the case where a benefit (and therefore a benefit in kind charge) does arise, the employer will need to report this to HMRC in the usual way.