First-tier Tribunal (Tax)

[2010] UKFTT 489 (TC)

 

 

 

 

 

 

 

TC00749

 

Appeal number:  TC/09/13312

TC/09/13315

TC/09/13317

 

 

Income tax – Benefits in kind – Employees contributed 4% and 5% respectively to purchase price of cars jointly owned with employer – Whether car ‘made available (without any transfer of the property in it’ – Income and Corporation Taxes Act 1988 ss.1564, 156, 157 and Income Tax (Earnings and Pensions Act 2003 ss.120-140 – Christenson (HM Inspector of Taxes) v Vasali followed – Whether Appellants negligent – Whether penalties due under s.95(1)(a) Taxes and Management Act 1970

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

SAMSON PUBLISHING LTD

E J C FEHLER

N S FEHLER Appellants

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

TRIBUNAL:  MISS J C GORT (Judge)

 

Sitting in public in London on 27 July 2010

 

Mr M Samson, accountant, for the Appellants

 

Mr S Foxwell, advocate, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1. The first Appellant (“Samson”) appeals against a decision of the Commissioners made on 23 May 2007 under section 8 of the Social Security Contributions and Benefits Act 1992 in respect of Art 1A National Insurance Contributions for the years 2001/02, 2002/03 and 2003/04 that a total sum of £6,466.15 plus interest was owing. With regard to the second and third Appellants (“Mr E Fehler” and “Mr N Fehler”), discovery assessments were issued on 21 July 2007 which were upheld on review on 21 July 2009; they were also in respect of the periods 2001/02, 2002/03 and 2003/04.  With regard to Mr E Fehler, the sums involved were £3,168 for the period 01/02, £4,880 for the period 02/03 and £4,810 for the period 03/04.  With regard to Mr N Fehler the sums were respectively £1,822.40, £3,219.20 and £3,290.80.  The assessments were made under section 29 of the Taxes and Management Act 1970.  Mr E J Fehler and Mr N S Fehler both appeal against penalties issued under section 95(1)(a) Taxes and Management Act 1970 issued on 27 February 2009.  The penalty in respect of Mr E Fehler was £1,286 and in respect of Mr N Fehler it was £833.  The penalties were issued in respect of the years ended 02/04.

 

2. Mr E J Fehler and Mr N S Fehler are directors of Samson.  Mr E J Fehler is the father of Mr N S Fehler, and the only other employee of the company is Mr E J Fehler’s wife who does the administration and bookkeeping.  The principal activity of Samson, a limited company was, at the time, print sales and administration, but it did not occupy commercial premises and all trading took place either telephonically, at the premises of customers, or at the premises of the companies engaged to supply customers’ orders. 

 

3. In or about 1998 Mr E J Fehler and Mr N S Fehler were advised to purchase the cars they needed to use on company business jointly with Samson.  The cars were therefore part-owned by Samson and part-owned by the relevant director.  The principal issue to be decided is, what is the correct tax treatment of the cars in question?  Should the discovery assessment on the directors’ income tax returns for the periods 01/02, 02/03 and 03/04 be upheld, that is should the directors be charged to car benefits, under s.157(1) of the Income and Corporation Taxes Act 1988 (“ICTA”) for years 01/02 and 02/03 and section 120-140 Income Tax (Earnings and pensions) Act 2003 for the year 2003/04?  Or should they, as the two directors had claimed on the relevant returns, be charged under sections 154-156 of ICTA 1988?  At the hearing itself an argument was put forward on behalf of Mr E J and Mr N S Fehler that in fact there should be no tax due from either party, there being no benefit in kind to them.  This was not an argument which had been raised earlier.  If the discovery assessments are upheld, then there is also the question of whether the attendant penalty should also be upheld on both Mr E J and Mr N S Fehler.  The issue of the employer’s national insurance contributions under section 8 imposed on Samson and the matter of the penalty appeals only arise if the  main appeal of Mr E  J and Mr N  S Fehler fail.

 

4. The facts are that both Mr E J and Mr N S Fehler owned cars of their own but needed to drive on company business.  On 8 August 2000 a second hand BMW 328i Sport Saloon car at an all-up price of £16,995 was purchased jointly by the company and N S Fehler.  The vehicle was, in part, paid by a sum of £682 in respect of the part exchange of a Vauxhall Vectra which was jointly owned by the company and N S Fehler in the proportion 95:5, in part by a deposit paid by the company of £685 and the £15,628 balance of the car purchase price was paid by a Finance Agreement undertaken by the company.  The invoice is made out to both the company and to N S Fehler. 

 

5. On 15 January 2001 Mr E J Fehler ordered a new BMW 530i Sport Saloon car at an all-up price of £41,000 for which he paid a personal deposit of £1000.  The car was delivered on 19 March 2001 and had a personalised registration number 111EJF.  Mr E J Fehler paid a sum of £16,400 personally, the company paid a deposit of £4,600 and undertook a Finance Agreement to fund the balance of the car’s purchase price.  The vehicle registration document shows E J Fehler as the registered keeper of the vehicle. 

 

6. On 21 August 2003 a second-hand Mitsubishi  Pajero 2800BD Super Exceed Saloon car which cost £11,000 was delivered.  Mr N S Fehler paid a personal deposit of £1,100 and the company paid over the £9,900 balance of the purchase price by cheque.  The vehicle registration document shows the company as the registered keeper of the vehicle.  On that occasion the invoice was made out in the name of Mr N S Fehler. 

 

7. At all relevant times both Mr E J and Mr N S Fehler had other vehicles other than those part owned by the company available to them for private use and used those vehicles for private purposes.  Both Mr N S and Mr E J Fehler maintained accurate records of the mileage for which the jointly-owned cars were used for business purposes and for other purposes.  The prime record was an entry in personal diaries of the journeys made and totalled daily, these entries were used to complete staff expenses claims.  Mr E J Fehler’s private use of his jointly-owned vehicle was less than 40% of the total use of that vehicle.  Mr N S Fehler, for the year ended 5 April 2002, used the vehicle which he jointly-owned for approximately 7% of the total use of the vehicle; for the year ended 5 April 2003 he used it for approximately 6% of the total usage and for the year ended April 2004 his use was somewhere under 2%.  On 6 April 2004 full ownership of all the cars was transferred to Mr E J and Mr N S Fehler.

 

8. The company’s returns for the year ended 31 October 1999 contain a note which reads:  “Tangible fixed asset include a motor car which is owned jointly by the company and Mr N S Fehler.  The company’s interest in the motor car is included in the financial statements at the net cost to the company, representing approximately 95% of the total cost of the vehicle”.  Under the heading ‘Related Party Disclosures’ it is stated: “A motor car included in tangible fixed assets is jointly owned with Mr N S Fehler (see Note 5)”.  The same two statements appear in Samson’s accounts for year ended 31 October 2000 and 2001.  The notes for the year ended 31 October 2001 also include the following: “A motor car included in tangible fixed asset is jointly owned with Mr E J Fehler (see Note 5).  That note states: “Tangible fixed assets include a motor car which is owned jointly by the company and Mr E J Fehler.  The company’s interest and the motor is included in the financial statement at the net cost to the company, representing 60% of the total cost of the vehicle.”

 

9. Mr N S Fehler’s P11D expenses and benefit form under a heading “Assets placed at the employee’s disposal” set out the use of the Vauxhall Vectra.  It states:

 

12/08 1988 Car acquired by purchase from 3^rd  party  at open MV £20,500.00

and made available with 5% transfer of the property in it to N S Fehler.

 

MV of asset part owned personally by N S Fehler £  1,025.00

 

MV of asset part owned by Samson Publishing £19,475.00

 

 £20,500.00

Valuation of benefit chargeable under section 154 …”

 

There follows the calculation of an amount for private mileage and an amount for business mileage and a proportion thereof.  Mr N S Fehler’s return for the subsequent years do not refer in detail to the ownership of the car.  However the Notice of Coding for 2000-2001 states: “This tax code was amended in accordance with the detail shown on your 1998/1999 tax return.” The details for the 1998/1999 tax return are the same as those given for the year 1999/2000.  Mr E J Fehler’s tax return for the year 2001/2002 similarly include reference to the joint acquisition of the car.  The coding notice refers to ‘benefit in kind’ with regard to both Mr N S Fehler and Mr E J Fehler.”

 

10. The personalised registration plate on Mr E J Fehler’s car was not invoiced to him but to the company.  On the new vehicle order in respect of that car the purchaser is shown as “Mr E Fehler”.  It shows substantial optional extras on the car.  The vehicle registration documents were not produced, nor was there any evidence as to how insurance was paid for or in whose name it was, nor any relevant MOT documents.  There was no evidence as to who paid for the maintenance of the vehicle.

 

The Appellants’ case

 

11. On behalf of all three Appellants Mr Samson submitted that the present case  should be distinguished from Vasili 76 TC 116, a case which the taxpayer won before the Special Commissioner, but he lost on appeal to the High Court. In  Vasili a car was originally  acquired by the company and then was sold as to 5% to Mr Vasili. In the present case there was joint ownership of the vehicles from the outset. It was relevant that at all times both Mr E J and Mr N S Fehler had other cars available to them and the records were consistent with that position.  It was submitted that in Vasili the Judge considered that the 5% Mr Vasili paid was a capital contribution to the cost of the vehicle, whereas in the present case in respect of Mr E J Fehler the 40% payment could not possibly be considered in that way.  Furthermore it was not accepted by Mr Samson that Vasili was of general application because Pumfrey J in that case had said in the final paragraph:

 

“I conclude that in these circumstances set out in the Agreed Statement of Facts, on a proper construction of section 157 that section applies to impose a charge to tax on the benefit of the car.”

 

Mr Samson submitted that it therefore followed that Vasili was restricted to its particular circumstances.  He pointed to paragraph 10 of the judgment where Pumfrey J stated that:

 

“There is no doubt that Parliament did not consider the position of cars co-owned by employer and employee expressly.”

 

Furthermore at paragraph 17 the judge continued:

 

“For the reasons I have given, therefore, it seems to me that it is not clear that the solution to the problem proposed by the Special Commissioner (assessability of the benefit of the employee’s private use of the jointly owned car under section 154 TA 1988) is any more satisfactory as a matter of principle than that proposed by the Inland Revenue (assessability of the benefit of the employee’s private use of jointly owned car under section 157 TA 1988).”

 

This it was submitted was equivalent to supporting the view that each case of assessability to tax on the benefit of the private use by the employee of a jointly owned car provided by his employer needs to be considered on its own merit.

 

12. Mr Samson submitted that the present case was to be further distinguished from Vasili in that none of the cars concerned here were trophy cars as was the case in Vasili.  The proportions in which the cars were acquired were intended by the  Fehlers to reflect the use to which the cars were to be put and the way they were used in fact.  The private use of the cars was the exclusive use by N S Fehler and E J Fehler in respect of their own interest in the cars and the business use was the exclusive use of the cars by the company.

 

13. In respect of the penalty imposed on both E J Fehler and N S Fehler, Mr Samson pointed to Mr N S Fehler’s 1999 and 2001 tax returns which specifically give details of the car jointly-owned by him and the company and his return for 2001 also makes reference to the car.  The forms P11D which were submitted by the Fehlers were captured and attended to by the Commissioners as evidenced by the notices of coding assessing the benefits computed under section 154 as per the forms P11D which had been submitted.  Mr Samson submitted that for the years 2002, 2003 and 2004 Mr N S Fehler was clearly reporting assessable benefits in the same manner as in the previous years which has been accepted by the Commissioners.  Furthermore Vasili was not known at the time of the change of car ownership. 

 

14. I was referred by Mr Samson to the case of Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2004] UK HL 51.  That was the House of Lords case in which the Capital Allowances Act 1990 section 24(1) was considered.  It was held that the essence of the new approach to the construction of revenue statutes first applied in the Ramsay case was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answer to the statutory description.  From this Mr Samson concluded that section 157 and 154 ICTA 1988, now sections 120-148 ITEPA 2003, were intended to tax a benefit arising to an employee in relation, inter alia, to the assets made available by an employer.  In the case of the company and E J Fehler and N S Fehler, no benefit was enjoyed because any personal use of the asset was more than paid for by the employees’ own part-purchase of it.  Whilst it was accepted that Mr N S Fehler had used the vehicle for more than 5% in years 2002 and 2003, in 2004 its usage had been under 2% of the total vehicle usage and therefore the average for the three years was 5% and so his usage was no more than his ownership.

 

15. Section 154(1)(b) imposed a charge on a benefit provided to an employee by reason of his employment the cost of which is not (apart from this section) chargeable to tax as his income,  There is an implication that a benefit otherwise chargeable under section 157 might be charged to income tax under another section of the Taxes Act and in particular, Mr Samson suggested in the instance case, under section 154. The legislation in section 159(3) ICTA 1988 excludes the possibility of a pool car being assessed to tax under what was sections 154 and 157 ICTA 1988.  The implication is that the benefit to an employee of a car capable of private use and made available by his employer, may be assessable under either section 154 or section 157.  Section 157 cannot therefore be said to have been enacted so as to charge to income tax the benefit of private use by an employee of a car provided by his employer in all cases.  It was submitted by Mr Samson in this case that the correct charging section was not section 157 ICTA 1988. 

 

16. Mr Samson further submitted that, in the present case, by virtue of the joint ownership of the vehicles, no benefit in kind had been conferred on either Mr E J or Mr N S Fehler, and that neither of them were liable to tax under section 154, given they had not received a benefit in kind but had been making use of what was their own property.  While the joint ownership of cars does not result in each joint owner having a separate physical part of the car he suggested that it is perfectly possible for each use of a car to be identified as a separate use made by and for one but not the other of the joint owners of the car.  Because there was no benefit to the directors in using the cars, so there was no benefit to assess and section 157 was not in point.

 

17. With regard to the penalty, Mr Samson submitted that a reasonable person would say that neither Mr E J nor Mr N S Fehler had been negligent.  Samson was a private company and in respect of the returns for all the prior years there had been full disclosure about the position of the vehicles on the P11D forms which were submitted with copious explanations of the manner of assessing the benefit in kind.  Both Fehlers continued to make returns on the same basis and could not be said to have been negligent and therefore the penalty should not apply. 

 

The Respondents’ case

 

18. On behalf of the Commissioners Mr Foxwell submitted that the income tax returns for both Mr E J Fehler and Mr N S Fehler for the years 2001/02 until 2003/04 inclusive were incorrect because they treated the cars part-owned by Samson and part by them as general assets and not pure car benefits.  This resulted in a lower benefit charge than would normally be the case.  Equally the corporation tax returns for Samson were incorrect for the same years as more Employers’ NIC was due on car benefits rather than on general benefits.  It was submitted that part ownership of a car did not negate the effects of the Car Benefit legislation.  That had to be considered first and, if applicable, took precedence over any charge under the general benefit legislation.  Sections 154-156 of ICTA only became relevant if section 157 does not apply, that was a matter of statutory priority.  Also whilst it was conceded that conceptually it was possible to separate one car into two assets, it was a fact that neither part could be used without the other.  As both the Fehlers controlled Samson, they were both employer and employee.  Any arrangement between the co-owners not to exercise a right to use the cars was not within the scope of the Car Benefit legislation.  That was only concerned with a car being made available, it was not concerned with an interest in a car or a part share of a car.  Although Samson owned 95% and 60% of the two cars respectively, it had made 100% of them available for private use. 

 

19. Mr Foxwell did not accept that the case was distinguishable from Vasili.  He submitted that section 157 established a special regime for motor cars and it applied whether the employee had 40% or 0.001% of the car.  In the present case the arrangement was set up to seek to avoid the application of the car benefit rules, but it had failed so to do. It was not said in terms in Vasili that the legislation was inadequate.  If a car is made available to an employee it is caught by the Car Benefit legislation.

 

20. Mr Foxwell further submitted that Section 155(1) of the Income and Corporation Tax Act was specifically enacted to avoid double taxation and to prevent a second charge under section 154 in addition to one under section 157.  That section does not however provide that if section 154 applies, then section 157 does not apply.  Mr Foxwell pointed to the absence of evidence in the present case, in particular there being to no reference to Samson on the invoice to Mr E J Fehler for the purchase of the car, so it remained unclear who had actually bought it.  It was also unclear who had decided on the optional extras and the invoice in respect of the personalised registration plate was made out to the company, not to Mr E J Fehler.  There was insufficient evidence to support the claim of the proportions of the purchase which were likely to have been provided after the purchase itself.  He accepted that the Fehlers would have a stronger case had separate invoices been issued.  The invoices seen were ambiguous.  There had been no vehicle registration documents, no insurance documents and no MOT documents provided to show how they were paid for. 

 

21. With regard to the penalty, the P11D forms were part of Samson’s return, not the directors’ returns.  In respect of the Notice of Coding, the processing office did not look critically at the returns.  Both Mr E J and Mr N S Fehler had been negligent in that they had not drawn the matter of the cars to HMRC’s attention.  It was not sufficient to say that reference was made in the company’s returns, the full details should be shown on the face of the directors’ returns. 

 

Reasons for decision

 

22. The principal question for me to decide is whether the facts in this case which make it distinguishable from Vasili are sufficient, or of sufficient weight, to make the case distinguishable on the point of law which was decided in Vasili. The distinguishing features relied on here are:

 

(i) The company had no prior interest in the vehicles;

(ii) The company and the Fehlers obtained their interests at the same time;

(iii) E J Fehler had a significantly greater share in the vehicle than did Mr Vasili;

(iv) E J Fehler’s private use of the vehicle was less than his ownership share, similarly with N S Fehler;

(v) The scheme was not entered into to avoid tax.

 

23. Dealing with (v) first, I do not accept the contention made by Mr Samson that in the present case the purpose of the co-ownership was not to avoid tax, as he claimed on behalf of the Fehlers.  The Fehlers gave no evidence either orally or in the form of witness statements and there was simply no other evidence from which the purpose of the scheme could be concluded, therefore I do not find that this is a ground for distinguishing Vasili where that was an admitted purpose.

 

24. With regard to (i) and (ii) I accept on the basis of the documents that there was no prior ownership of the cars in the way that existed in Vasili.  Although there is no evidence as to how and when the company did decide to make its contribution to the purchase(s), it is reasonable to conclude on the balance of probabilities that Mr E J Fehler made the decision with respect to the purchase(s) in his capacity as director of the company, and therefore the company’s and the employee’s decision coincided.  The evidence as to the timing of the actual acquisition of the different interests is, however, not clear and is equally consistent with Mr E J Fehler obtaining an interest prior to the company acquiring its interest as with the opposite.  It is the case that Mr E J Fehler’s share, at 40%, was considerably greater than was Mr Vasili’s, which was only 5%; Mr N S Fehler’s share was comparable to Mr Vasili’s.  It is apparent that the circumstances relating to Mr E J Fehler’s purchase and use are different from those of Mr N S Fehler, whose usage in the period 2001-2002 and 2002-2203 is not comparable to his ownership share, but exceeds it.  It is not sufficient in my judgment to say that, because in the year 2003-2004 his usage amounted to less than 2%, therefore the average usage over the three years in question being  no more than 5% does not exceed his ownership share.  I therefore do not accept that N S Fehler’s case can be distinguished from Mr Vasili’s on that ground. 

 

25. The basis for the decision in Vasili is given at paragraph 11 where Pumfrey J said:

“Turning now to the words in issue, I consider that the words “made available (without any transfer of the property in it)” are not to be construed in a manner which has the result that the conferring of any interests upon the employee sufficient to give the employee an independent right to process and use the asset is sufficient to prevent the car from being “made available”.  My reasons are these.

 

“12. First, the words “without any transfer of the property in it” are not apt to cover the conferring of a part interest only on the employee.  There is some force in the submission that to construe them in any other sense involves the introduction of the words “any of” before the words “the property”.  That is not my principle reason.  In the ordinary sense, the question “who made the car available to Mr Vasili?”  Must be answered in the sense that his employer did so, and has not been paid for it.  To the extent to which the purchase price is paid by Mr Vasili to the employer, this construction will only be acceptable if a proper allowance can be made first to reduce the “cash equivalent” under section 157.  This depends crucially on the effect of section 168B of the ICTA.”

 

26. The learned judge then sets out an argument by Mr Grodzinski, who appeared on behalf of the Inland Revenue, and then continued:

 

“This contention which certainly appears in his skeleton argument advanced before the Special Commissioner (who had allowed the appeal) was that section 168B did apply even where some part interest had been acquired by the employee, at least up to the value of the cap (£5,000).”

 

“It seems to me anomalous that a payment by the employee towards the acquisition of the car should give rise to a capped discount if the employee does not acquire a property interest in the car by virtue of his contribution, but, if he does acquire such an interest, should result in a charge not under section 157 but under section 154.”

 

The judge then cites and considers the decision of the Special Commissioner and states at paragraph 16:

 

“… it should be observed that the Special Commissioner plainly contemplates that in the circumstances he outlines there is no chargeable benefit under section 154.  If on the other hand the use is not “proportionately to ownership right” and the employee’s use is greater, there would be a charge to tax, and the cash equivalent would be computed under section 156(5).  That section 156(5) would seem to embrace both an asset placed at the employee’s disposal (without any transfer of the property in the asset), and an asset used wholly or partly for his purposes.  It thus appears to be indifferent to the magnitude of the employee’s interest.  Furthermore, it is plain from the provisions of section 156(5)(b)(i) that the section contemplates that the owner of the whole asset is one person who is not the employee. 

 

“17. For the reasons I have given, therefore, it seems to me that it is not clear that the solution to the problem proposed by the Special Commission is any more satisfactory as a matter of principle than that proposed by the Inland Revenue.  Mr Grodzinski submitted that it is plain that section 157 establishes a special regime for motor cars and that that regime should be applied as the words of the section can reasonably bear a meaning that encompasses the present case and that the treatment in section 168B of employees’ contributions for the purchase of a motor car shows that that possibility has been considered by the legislature and accommodated.  I agree.  Since those provisions are capable of being employed in the present case, I consider that the solution proposed by Mr Grodzinski to be correct.”

 

The judgment concludes with paragraph 18 which is cited above and the appeal of the Inland Revenue from the decision of the Special Commissioner was allowed.

 

27. It is apparent from the above that situations other than those of Mr Vasili, and situations more approximate to the current situation were considered by the learned judge.  In the present case, despite the lack of clarity in section 157, and the provision of co-owners of cars not being considered expressly, I am bound by the judge’s conclusion that the legislature did consider the present situation when it enacted the provisions in section168B.  The features in this case which make it different from Vasili are not, in my judgment, sufficient to distinguish it.  The appeals of Samson, and both Mr E J and Mr N S Fehler against the assessment are dismissed.  However, with regard to the penalties imposed under s.95(1)(a) TMA, I do not find either Mr E J or Mr N S Fehler were negligent.  They both were mistaken as to the correct method of accounting for their interest in their respective cars, but they were not trying to mislead the Commissioners or conceal their interest in any way.  At the time they completed their earlier forms the case of Vasili had been decided by the Special Commissioners in Mr Vasili’s favour.  The High Court decision in that case was released on 19 March 2004, but it in my judgment would be harsh to expect the Fehlers immediately to have understood the effect of that decision in their particular case, and I do not find that either of them were negligent.  I therefore allow the appeals of Mr E J and Mr N S Fehler with regard to the penalties.

 

 

28. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

 

 

MISS J C GORT

TRIBUNAL JUDGE

RELEASE DATE: 14 October 2010