Cars leased to employees income tax free

Posted: 24th March 2016

Car parkAlthough the way in which benefits of employment are taxed is relevant to millions, it is an intensely complex field which only a specialist can be expected to understand. One Court of Appeal case which proved that point involved a company that leased cars to its salesmen and managers on arm's-length commercial terms.

Employees needed the cars for their work, some of them driving up to 25,000 miles on business annually. However, in an arrangement from which they derived no personal financial advantage, the company required them to pay lease charges at full market value on the hire cars which were allocated to them.

That did not, however, prevent HM Revenue and Customs (HMRC) arguing that employees should be charged Income Tax on the cash equivalent of the leased cars, calculated in accordance with the Income Tax (Earnings and Pensions) Act 2003. Those submissions failed to persuade the First-tier and Upper Tribunals.

In dismissing HMRC’s challenge to those decisions, the Court found that the word ‘benefit’, within the Act, bore the same meaning as in common parlance. The employees would only be chargeable to tax if the terms on which the cars were leased to them conferred a benefit on them in the ordinary sense of the word. On the facts of the case, the company’s employees received no such benefit.