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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> HM Revenue & Customs v Apollo Fuels Ltd & Ors & Anor [2016] EWCA Civ 157 (17 March 2016) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2016/157.html Cite as: [2016] EWCA Civ 157, [2016] STI 1155, [2016] STC 1594, [2016] 4 WLR 96, [2016] 4 All ER 464, [2016] RTR 24, [2016] WLR(D) 147, [2016] BTC 12 |
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ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
THE HONOURABLE MRS JUSTICE ROSE
FTC/42/2013
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE SALES
and
LORD JUSTICE DAVID RICHARDS
____________________
THE COMMISSIONERS FOR HM REVENUE & CUSTOMS |
Appellants |
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- and - |
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(1) ![]() (2) BRIAN EDWARDS & ORS |
Respondents |
____________________
Rory Mullan and Oliver Marre (instructed by Bury Walkers LLP) for the Respondents
Hearing dates: 24 and 25 November 2015
____________________
Crown Copyright ©
Lord Justice David Richards:
Introduction
"Income tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else."
Income is not confined to salary, wages or other payments in money. Income may be received in other forms, such as benefits in kind. It is not surprising that the income tax legislation brings such benefits into charge, by ascribing a value to them and treating them as income. Goods or services supplied to an employee for full value would not ordinarily be regarded as conferring a benefit on the employee or as involving the receipt of income by him. A tax on the value of such goods or services would therefore be in the nature of a tax on consumption, rather than a tax on income. Of course, it is open to Parliament to deem the value of such goods or services, or indeed anything else, to be income, but one would expect Parliament to do so in clear terms. To borrow Lord Hodge's phrase in Forde & McHugh Ltd v Revenue & Customs Commissioners [2014] UKSC 14; [2014] 1 WLR 810 at [16], "the ordinary man on the underground would consider it to be counter-intuitive" that an employee should be subject to income tax on a supply for which he paid full value. Where that test was satisfied, Lord Hodge was "reluctant to attribute such a view to Parliament absent clear words or necessary implication."
The facts
"2. The corporate Respondents to this appeal are six companies in the Newell & Wright group. That group carries on a variety of trades and businesses including the distribution of fuel oils, transport contracting, tanker manufacturing fabrication and sales, freight forwarding and haulage, and vehicle hire and sales. I shall refer to the corporate Respondents as 'the Group'.
3. The Group historically provided cars to salesmen and managers employed by its subsidiaries both as a perquisite of their employment and to enable them to carry out their duties. The cars were mainly second-hand and purchased at auction. The duties of the employees concerned included visiting new and existing customers and suppliers, delivering freight to customers, travelling between various company sites and visiting the companies' banks, accountants, etc. The annual business mileage of each of the employees concerned varied between 5,000 and 25,000 miles.
4. From 6 April 2002 there was a change in the law relating to the taxation of the provision of company cars to employees. Before that date, employees were charged to income tax as if a sum equal to 35 per cent of the value of the car when new was added to their income, but the charge was reduced to 25 per cent for employees who travelled more than 2,000 business miles in the year, and to 15 per cent for those who travelled more than 18,000 business miles. Further, if the car were four or more years old, the tax charge was reduced by one quarter.
5. Following the change, there was no longer any reduction in the charge to tax based on the extent of an employee's business travel or for the age of the car. Instead employees were charged to tax in the sum of 15 per cent (since reduced to 10 per cent) of the list price of the car if its CO2 emissions were below a specified figure, with an addition of 1 per cent of the value charged for each 5g/km above that figure.
6. Following those changes, the Group decided it would move to an arrangement whereby it would lease the cars to the workforce for an arm's length hire rental. The original car provision scheme was ended in or about April 2003, and the new car leasing scheme implemented on its termination. All 26 employees who had previously been provided with a car agreed to the new arrangements and entered into car leases. Under the new arrangements, employees were told that they would be paid for business mileage at the same rate as other Group employees who used their own cars for business purposes. Sums due to the Employees as mileage allowance payments would be set off against the rentals they owed to the Group under the car leases. 20 of the Group's employees are also Respondents to this appeal ('the Employees').
7. Each lease entered into by the Employees was a one-page document setting out the make and registration number of the car, the monthly rental and the VAT charged. The lease provides that amounts due in respect of mileage payments can be set off against the rental and that:
"Should you give notice to leave the company you will have to
A) Complete a standing order mandate for future rentals should you wish to continue hiring the vehicle, or
B) Return the vehicle and any money owing will be settled on your last day."
8. The lease also provided that the Employee could cancel the agreement at any time, subject to 7 days notice or mutual agreement. The lease did not confer on the Group the right to cancel and did not restrict in any way the use that could be made of the car by the Employee.
9. It is accepted by HMRC that the rental paid by the Employees under the individual leases is an arm's length commercial rental as would be paid for the particular car if the Employee had hired it from a third party car hire company. The Tribunal heard evidence from the Group about how the rental charges had been calculated and made this finding of fact. It is not challenged by HMRC in this appeal. HMRC argue, however, that the car is still a benefit that falls to be taxed under Chapter 6 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 ('ITEPA') because the arrangements falls within section 114 of that Act. The Respondents say that Chapter 6 has no application in the circumstances of this case.
10. Because the Respondents had formed the view that the provision of the cars was not a taxable benefit, they did not deduct the tax now alleged to be due from the Employees' pay under the PAYE scheme or notify HMRC that cars were being provided to the Employees under the leases. HMRC, having concluded that the cars are subject to tax, served notices of assessment for that tax on the Employees rather than on the Group, under section 29 of the Taxes Management Act 1970. It was the Employees therefore who brought the appeal before the Tribunal in respect of the liability to tax on the car benefit. The Group's appeal related to HMRC's assertion that the Group was liable to pay NICs in respect of the use of the cars and in respect of the taxation and NIC liability for the mileage allowance payments.
11. The Tribunal found that no tax and no NICs were due to be paid in respect either of the cars or of the mileage allowance. HMRC do not challenge the finding that NIC contributions are not payable on the mileage allowance payments. Their appeal asserts that the Tribunal erred in finding that the Employees were not liable to pay tax on the cars and that the Group was not liable (i) to account for PAYE on the mileage allowance payments made to the Employees and (ii) to pay NICs on the cars under section 10 of the Social Security Contributions and Benefits Act 1992."
The relevant statutory provisions
"(a) any salary, wages or fee,
(b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth, or
(c) anything else that constitutes an emolument of the employment."
"(1) This section applies if, apart from this section, the same benefit would give rise to two amounts ("A") and ("B") –
(a) A being an amount of earnings as defined in Chapter 1 of this Part, and
(b) B being an amount to be treated as earnings under the benefits code.
(2) In such a case –
(a) A constitutes earnings as defined in Chapter 1 of this Part, and
(b) the amount (if any) by which B exceeds A is to be treated as earnings under the benefits code."
"(1) This Chapter applies to a car or a van in relation to a particular tax year if in that year the car or van –
(a) is made available (without any transfer of the property in it) to an employee or a member of the employee's family or household,
(b) is so made available by reason of the employment (see section 117), and
(c) is available for the employee's or member's private use (see section 118).
(2) Where this Chapter applies to a car or van –
(a) sections 120 to 148 provide for the cash equivalent of the benefit of the car to be treated as earnings,
(b) sections 149 to 153 provide for the cash equivalent of the benefit of any fuel provided for the car to be treated as earnings,
(c) sections 154 to 159 provide for the cash equivalent of the benefit of any fuel provided for the van to be treated as earnings; and
(d) sections 160 to 164 provide for the cash equivalent of the benefit of any fuel provided for the van to be treated as earnings in certain circumstances.
(3) 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 (see section 119)."
"(1) If this Chapter applies to a car in relation to a particular tax year, the cash equivalent of the benefit of the car is to be treated as earnings from the employment for that year.
(2) In such a case the employee is referred to in this Chapter as being chargeable to tax in respect of the car in that year."
"(1) The cash equivalent of the benefit of a car for a tax year is calculated as follows –
Step 1
Find the price of the car in accordance with sections 122 to 124A.
Step 2
Add the price of any accessories which fall to be taken into account in accordance with sections 125 to 131.
Step 3
Make any deduction under section 132 for capital contributions made by the employee to the cost of the car or accessories.
Step 4
If the amount carried forward from step 3 exceeds £80,000, the interim sum is £80,000.
In any other case, the interim sum is the amount carried forward from step 3.
Step 5
Find the appropriate percentage for the car for the year in accordance with sections 133 to 142.
Step 6
Multiply the interim sum by the appropriate percentage for the car for the year.
Step 7
Make any deduction under section 143 for any periods when the car was unavailable.
The resulting amount is the provisional sum.
Step 8
Make any deduction from the provisional sum under section 144 in respect of payments by the employee for the private use of the car.
The result is the cash equivalent of the benefit of the car for the year."
The issues
"a. Does the lease between the Group and its Employees involve a transfer of property in the car? If so, then the requirement in parentheses in subsection (1)(a) that the making available of the car has to be without any transfer of the property in it is not satisfied and the arrangements will fall outside Chapter 6. This raises two sub-issues:
i. Do the leases transfer any property in the car to the Employees?
ii. If so, is the transfer of a partial interest in the car enough to preclude the application of the subsection (1)(a) and hence take the arrangements outside the scope of Chapter 6?
b. Is there another section of the ITEPA which treats an amount in respect of the cars here as earnings from the employment so that section 114(3) applies to take the arrangements outside Chapter 6? In particular, does section 62 apply even though it is accepted by the Respondents that the amount treated as earnings by section 62 would in the case of at least some of these Employees be nil?
c. Does the fact that, as HMRC accepts, the Employees paid the full market value for the cars mean that there is no 'benefit of the car' within the meaning of section 120 and hence nothing which can be liable to tax in this case?"
Transfer of property
"Contractual rights which entitle the hirer to indefinite possession of chattels so long as the hire payments are duly made, and which qualify and limit the owner's general property in the chattels, cannot aptly be described as purely contractual rights."
Such rights were more than "purely contractual", and may have created a proprietary interest in favour of the hirer, but they did not involve the transfer of the property in the chattels to the hirer but merely qualified and limited "the owner's general property in the chattels".
"Benefit of the car"
"I agree with the Respondents that the use of the word "benefit" in the benefits code is an indicator that what is intended to be caught is something which benefits the employee and that there is no such "benefit" if the employee has paid the market rate for the asset which is provided. It is true that the way that the benefit is calculated under the current provisions (taking into account the list price and the level of CO2 emissions) reflects other policy considerations. But that cannot, in my judgment, affect the more fundamental point of whether there is a benefit to which those current provisions should be applied."
Rose J said that this textual indicator was strongly supported by two appellate decisions on which the employees relied, Mairs (Inspector of Taxes) v Haughey (1992) 66 TC 273 (Court of Appeal of Northern Ireland) and Wilson (Inspector of Taxes) v Clayton [2003] EWCA Civ 1657; [2005] STC 157. She also accepted the submission that "benefit" cannot mean something different in Sections 114 and 120 from its meaning in section 203 in Chapter 10 of Part 3, particularly in light of section 63.
"I therefore consider that Mairs v Haughey and Wilson v Clayton are authorities establishing that fair bargains are excluded from the regime for taxing benefits conferred on employees because there is no benefit which is properly subject to tax. Since HMRC accept that the leases between the Group and the Employees were at arm's length, there is no benefit here which is subject to tax under Chapter 6."
"It is an inherent feature of the scheme that such contributions, whilst possibly being regarded in the real world as fair value or market value, will in some circumstances be insufficient to prevent deemed income arising because of the fundamental mechanism of Chapter 6 which is to use the list price of a car as new and then to deem an annual benefit based on its CO2 emissions".
"(a) by reason of his employment there is provided for him … any benefit to which this section applies … ; and
(b) the cost of providing the benefit is not (apart from this section) chargeable to tax as his income,
there is to be treated as emoluments of the employment, and accordingly chargeable to income tax under Schedule E, an amount equal to whatever is the cash equivalent of the benefit."
Section 154(2) provided that the benefits to which the section applied were accommodation, entertainment, domestic or other services "and other benefits and facilities of whatsoever nature", with certain specified exceptions.
"Section 154 brings benefits into charge. All kinds of benefits are covered: but whatever they are, they must still be capable of being described as "benefits". The legislation is aimed at profits (in a broad sense) which escape taxation under the mainstream Sch E provisions for one reason or another. It is not aimed at receipts resulting from fair bargains."
"In my opinion, the decision of the Special Commissioner on this point was correct. The Respondent received the payment of £4,506 in return for surrendering his contingent right to receive a payment under the enhanced redundancy scheme, and the Special Commissioner held, at page 4D of his decision, that the payment did not overvalue that right. Therefore, I consider that the Respondent did not receive a "benefit" within the meaning of s.154 where the money received was paid to him, by way of fair valuation, in consideration of his surrender of a right to receive a larger sum in the event of the contingency of redundancy occurring."
"The justice of excluding from the scope of s154 a payment made by an employer to an employee pursuant to a fair bargain seems to me self-evident, and, as Clarke LJ suggested in the course of the argument, it may explain why a payment made by the employer to an employee pursuant to an award of damages or to a settlement of a claim for such damages is, as the Crown accepts, not within s154. Where parties at arm's length arrive at a genuine compromise in settlement of hostile litigation, it would be an extremely difficult task for any tribunal or court to unpick the constituent parts of the bargain and to put a value on those parts. For my part, I would not rule out the possibility that it might be shown in some cases that the reason for the payment was to confer a gratuitous benefit within a compromise agreement so that to that extent s154 might apply. But there is no suggestion that there was any such reason in the present case."
"This Chapter does not apply to living accommodation provided for an employee if –
(a) the employer is a local authority,
(b) it is provided for the employee by the authority, and
(c) the terms on which it is provided are no more favourable than those on which similar accommodation is provided by the authority for persons who are not their employees but whose circumstances are otherwise similar to those of the employee."
"The cash equivalent of the benefit of an employee-related loan is to be treated as earnings from the employee's employment for a tax year if the loan is a taxable cheap loan in relation to that year."
"one as to which it is sensible to say that 'the benefit of which was obtained by reason of his employment'. The sub-section is quite plainly applicable to all loans obtained by reason of employment even if a loan is for a full commercial rate of interest".
"It is apparent that it is not necessary for there to be a benefit, in the terms of something advantageous to the employee, found for section 66 to apply. The reference in the heading to the chapter to "Benefits" does not to my mind compel any different conclusion. Such a heading is in general terms applicable to a whole group of sections."
"… he submitted that for the purposes of s66 it is not necessary to find as a fact that a benefit accrued to the employee from the loan. He submitted that s66(1), and indeed other sub-sections, simply assumed that it was appropriate to refer to a borrower as having the benefit of a loan in the same way as it is common enough in ordinary parlance to ask the question, "did you receive the benefit of the loan?" without going into the question whether in fact the loan provided a benefit for the borrower."
Section 114(3)
"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 (see section 119)."
It is common ground that the reference to section 119 is not in point in this case.
"something that is –
(a) of direct monetary value to the employee, or
(b) capable of being converted into money or something of direct monetary value to the employee."
"I hold that on the proper construction of section 114(3), if the arrangement falls to be considered under section 62 ITEPA because the car is money or money's worth then it falls outside section 114. That is the case even if, because of the payments made by the employee in return for receiving the asset that constitutes 'money's worth', the amount of the earnings that falls to be taxed under section 62 is in fact nil in a particular case. Section 114(3) is intended to settle the interrelationship between Chapter 6 and section 62 and that does not depend on the happenstance of whether in a particular case there is a small excess of the money's worth."
"If the Employees had paid less than full market value for the lease of the cars then HMRC accept that there would be something that falls to be taxed as earnings under section 62 and section 114(3) would apply to take the car provision outside Chapter 6 – a situation which is greatly preferable from the Respondents' point of view. It is only because HMRC acknowledges that the Employees have paid full market value for the car rental that the earnings are nil and the question of the application of Chapter 6 arises."
Mileage allowance
"(b) the cash equivalent of the benefit of the vehicle is to be treated as the employee's earnings for the tax year by virtue of –
(i) section 120 (benefit of car treated as earnings),
(ii) … or
(iii) section 203 (residual liability to charge: benefit treated as earnings), …"
"I agree with HMRC that the subsection is concerned with identifying vehicles which fall within the scope either of Chapter 6 or of Chapter 10 as opposed to whether an actual tax liability arises for the employee. It is intended to have the effect that if the car or van is within Chapter 6 or within the residual charge in Chapter 10, it is treated as a company car and different rules apply to any payments made for mileage from the rules which apply when an employee uses his own car. This does not depend on whether the cash equivalent is a positive value or nil."
Conclusion
Lord Justice Sales:
Lady Justice Sharp: