Factual and Procedural Background
The appeal concerns whether an employee is liable to income tax on a car leased to him by his employer on arm's length commercial terms, with lease charges at full market value. The tax authority contended that despite no financial benefit being derived by the employee and full market lease charges being paid, income tax is chargeable under Chapter 6 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), treating the "cash equivalent" of the leased car as earnings.
This contention was rejected by the First-tier Tribunal and, on appeal, by the Upper Tribunal. The tax authority appealed to the current court with permission.
The corporate respondents are six companies within a group engaged in various businesses including vehicle hire and sales. Historically, the group provided cars to certain employees as a perquisite, but following changes in tax law in 2002, the group introduced a leasing arrangement where cars were leased to employees at arm's length market rental. All employees previously provided with cars agreed to the new leasing scheme.
The leases were simple documents specifying car details, rental amounts, and terms allowing employees to cancel or continue leasing upon leaving employment. It was accepted that rentals reflected arm's length commercial terms. The tax authority argued that Chapter 6 of ITEPA still applied, making the car a taxable benefit, while the employees denied this.
Because the employees believed the cars were not taxable benefits, no tax was deducted via PAYE, prompting the tax authority to issue assessments directly to employees. The employees appealed the tax liability, and the group appealed related National Insurance Contributions (NIC) liabilities.
The principal issue is whether the leasing arrangements fall within Chapter 6 of Part 3 of ITEPA, which would require income tax and NIC payments. A secondary issue concerns whether mileage allowance payments are exempt from income tax under section 229 of ITEPA.
Legal Issues Presented
- Does the lease between the employer group and employees involve a transfer of property in the car, thereby excluding the arrangements from Chapter 6?
- Does section 114(3) of ITEPA exclude the application of Chapter 6 if another provision treats the amount as earnings?
- Does the fact that employees paid full market value for the cars mean there is no "benefit of the car" under section 120, and thus no taxable benefit?
- Are mileage allowance payments exempt from income tax under section 229 of ITEPA where cars are leased at full market value?
Arguments of the Parties
Tax Authority's Arguments
- Chapter 6 applies if the car is made available to the employee without transfer of property, by reason of employment, and available for private use.
- The term "benefit of the car" in Chapter 6 does not require the employee to receive a benefit in the ordinary sense or to have paid less than market value.
- The calculation of the cash equivalent based on list price and CO2 emissions reflects a deliberate policy choice and does not depend on whether the lease was at full market value.
- Chapter 6 is designed to tax the provision of cars regardless of whether the employee gains a financial advantage.
- Section 114(3) does not exclude Chapter 6 application if the amount treated as earnings under another provision is nil.
- Section 229 exemption for mileage allowance does not apply if the vehicle is a "company vehicle" as defined by section 236, which includes vehicles under Chapter 6 even if the cash equivalent is nil.
Employees' Arguments
- No transfer of property in the cars occurred under the leases, so Chapter 6 applies.
- The term "benefit" in Chapter 6 requires the employee to receive a benefit in the ordinary sense; paying full market value means no benefit arises.
- Precedents such as Mairs v Haughey and Wilson v Clayton establish that fair bargains do not give rise to taxable benefits.
- Section 114(3) excludes Chapter 6 if another provision treats the amount as earnings, even if that amount is nil.
- Mileage allowance payments should be exempt under section 229 if the cars are not "company vehicles" due to the nil cash equivalent.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| London County Council v Attorney-General [1901] AC 26 |
Income tax is a tax on income, not on anything else. |
Supported the principle that income tax should only apply to actual income or benefits, not consumption. |
| Forde & McHugh Ltd v Revenue & Customs Commissioners [2014] UKSC 14 |
Interpretation of "benefit" requiring clear words from Parliament to tax full value supplies. |
Supported the view that taxing an employee on a supply paid at full market value is counter-intuitive absent clear statutory language. |
| Bristol Airport plc v Powdrill [1990] Ch 744 |
Whether chattel leases confer proprietary interests. |
Considered in assessing whether leases transferred property in the cars. |
| On Demand Information plc v Michael Gerson (Finance) plc [2000] 1 WLR 155 |
Nature of proprietary interests in chattel leases. |
Used to analyze the nature of rights under the leases. |
| Celestial Aviation Trading 71 Ltd v Paramount Airways Private Ltd [2010] EWHC 185 (Comm) |
Proprietary rights under hire agreements. |
Considered in the context of property rights under leases. |
| Mairs (Inspector of Taxes) v Haughey (1992) 66 TC 273 |
Fair bargains do not give rise to taxable benefits under predecessor provisions. |
Applied to support that no taxable benefit arises where employee pays full market value. |
| Wilson (Inspector of Taxes) v Clayton [2003] EWCA Civ 1657; [2005] STC 157 |
Confirmed that fair bargains and compensation payments do not constitute taxable benefits. |
Supported the exclusion of fair bargains from taxable benefits under ITEPA. |
| Williams (Inspector of Taxes) v Todd [1988] STC 676 |
Interpretation of "benefit" in relation to loans and whether it requires an advantage to the employee. |
Held that "benefit" in loan provisions does not require actual advantage; relevant to discussion on Chapter 7 but not Chapter 6. |
Court's Reasoning and Analysis
The court analysed whether the leasing arrangements fell within Chapter 6 of Part 3 of ITEPA, which requires that a car be made available without transfer of property, by reason of employment, and available for private use. The court confirmed that the leases did not transfer the general property (legal title) in the cars to employees, but only contractual rights to possession, so section 114(1)(a) was satisfied.
The key issue was whether the employees received a "benefit of the car" under section 120. The court agreed with the Upper Tribunal that "benefit" carries its ordinary meaning, requiring an advantage to the employee. Since employees paid full market value for the leases, no benefit arose. The court found support in authorities establishing that fair bargains do not give rise to taxable benefits.
The court rejected the tax authority's argument that the statutory use of "benefit" is a mere drafting formula without substantive meaning. The court noted that the calculation of the cash equivalent based on list price and CO2 emissions is a valuation method for benefits, not a basis to deem benefits where none exist.
Regarding section 114(3), which excludes Chapter 6 if another provision treats the amount as earnings, the court disagreed with the Upper Tribunal’s acceptance that a nil amount under section 62 constitutes earnings. The court held that nil is not an amount and thus cannot trigger exclusion under section 114(3).
On the mileage allowance exemption under section 229, the court disagreed with the Upper Tribunal’s view that a nil cash equivalent still results in the car being a "company vehicle." The court held that a nil cash equivalent means no earnings arise and so the exemption should apply similarly to employees using their own cars.
In sum, the court concluded that no income tax charge arises under Chapter 6 where cars are leased at full market value, and no benefit in the ordinary sense is received by employees.
Holding and Implications
The court DISMISSED the appeal by the tax authority.
The direct effect is that employees leasing cars from their employer at full market value are not liable to income tax under Chapter 6 of ITEPA on the "benefit" of those cars, and the employer group is not liable for related National Insurance contributions. The court did not establish any new precedent beyond confirming the ordinary meaning of "benefit" and the application of Chapter 6 to fair market leasing arrangements. The decision maintains the principle that income tax is charged only on actual benefits or advantages, not on full-value commercial transactions.