HM Revenue & Customs v Apollo Fuels Ltd & Ors & Anor, Court of Appeal - Civil Division, March 17, 2016, [2016] EWCA Civ 157

Resolution Date:March 17, 2016
Issuing Organization:Civil Division
Actores:HM Revenue & Customs v Apollo Fuels Ltd & Ors & Anor

Case No: A3/2014/1326

Neutral Citation Number: [2016] EWCA Civ 157






Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 17 March 2016

Before :





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Between :

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David Yates (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Appellants

Rory Mullan and Oliver Marre (instructed by Bury Walkers LLP) for the Respondents

Hearing dates: 24 and 25 November 2015

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JudgmentLord Justice David Richards:


  1. The central issue on this appeal is whether an employee is liable to income tax in respect of a car leased to him by his employer on arm's length commercial terms, including lease charges at full market value. The Commissioners for HM Revenue & Customs (HMRC) contend that, although the employee does not derive any financial benefit from the lease and pays a full price by way of lease charges, he is nonetheless chargeable to income tax, by reason of Chapter 6 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The ``cash equivalent'' of the leased car, calculated in accordance with Chapter 6, is to be treated as part of the employee's earnings chargeable to income tax.

  2. HMRC's case was rejected by the First-tier Tribunal (Judge David Demack and Ann Christian) and, on appeal, by the Upper Tribunal (Rose J). HMRC appeal to this court with the permission of the Upper Tribunal.

  3. Income tax is a tax on income, or so it is generally understood. As Lord Macnaghten said in London County Council v Attorney-General [1901] AC 26 at 35:

    ``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

  4. The facts and procedural background are succinctly set out in paragraphs 2 to 11 of the Decision of the Upper Tribunal:

    ``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'.

  5. 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.

  6. 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.

  7. 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.

  8. 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').

  9. 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

    1. Complete a standing order mandate for future rentals should you wish to continue hiring the vehicle, or

    2. Return the vehicle and any money owing will be settled on your last day.''

  10. 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.

  11. 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.

  12. 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.

  13. 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.''

  14. The principal issue before the Upper Tribunal and on this appeal is whether the arrangements for leasing the cars to the employees fall within Chapter 6 of Part 3 of ITEPA. If so, it is common ground that both income tax and National Insurance contributions are payable in respect of the cars. There is also an issue as to whether payments for mileage allowance, in respect of business use of the cars by the employees, are exempt from income tax as falling within the exemption provided by section 229 of ITEPA.

    The relevant statutory provisions

  15. This appeal, and the hearings below, have proceeded on the basis of the provisions of ITEPA in force in the 2009/10 tax year.

  16. It is important to set the provisions of Chapter 6 of Part 3 of ITEPA in their statutory context. ITEPA imposes a charge to income tax on employment income, pension income and social security income: section 1(1). The provisions that define employment income, impose the charge to tax on it and set out exclusions and exemptions...

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