Forget the Ferrari

MIKE TRUMAN looks at the possibilities for tax-efficient 'business-only' cars, and asks why high-mileage business drivers get such a raw deal.

CHOOSING A FERRARI as your company car when you are trying a bit of novel tax planning is not a good idea. Last year, Mr Vasili tried to claim that he was only liable to tax on 20% of the cost of his second-hand Ferrari because he owned an interest in it, but the High Court thought otherwise (Christensen v Vasili [2004] STC 935). Other sports cars are just as bad — Mr Upton, trading as Fagomatic, failed to convince the Court of Appeal that his Lamborghini was not available for private use, and his claim for VAT input tax recovery was denied (CCE v Upton [2002] STC 640). Whilst the only colour for sports cars is, of course, red, it seems that the colour they send the fiscal authorities is green.
A Mercedes, though, is a sensible sort of car. Luxurious, admittedly, but respectable and reliable. So perhaps we shouldn't be surprised that Elm Milk Ltd, which chose to buy a Mercedes E320 for its director Mr Phillips to drive, was able to get a deduction for its input tax? But it made me think about the state of tax law as it applies to company cars, and particularly to those drivers who spend 80-90% of the time that they are in their cars on business trips, and who perhaps feel that they are treated unfairly by the current tax system.

CCE v Elm Milk Ltd

The High Court decision, given on 3 February, has not been fully reported yet — if you are reading this on our website, www.taxation.co.uk, we will add a full case reference when it is. Mr Justice Park appears, however, to have upheld the decision of Stephen Oliver who chaired the tribunal which heard the case originally (LON/03/718, decision 18592); indeed he praises the tribunal for its 'rigorous' testing of the contractual terms that underlie the decision.
The facts of the case were that Elm Milk Ltd was a company owned by the Phillips family, and at the time Mr Phillips was its sole director. He travelled some 50,000 miles a year on business. The company bought a Mercedes E320 and provided it to him for business travel only. There was a board minute which provided, amongst other things, that:

'the company did not intend to make the car available to anyone for private use, and that it would be a breach of an employee's terms of employment to use it for private purposes'.

The car was garaged overnight near the company's business premises, where the keys were kept, but these premises were only 50 yards away from Mr Phillips' home. The family had another car which was used for private motoring, and the tribunal accepted that Mr Phillips only used the car for business travel.
Customs denied input tax relief on the basis of the decision in Upton. There, Mr Upton claimed that he had bought his Lamborghini solely for the purposes of his business, which was the installation and maintenance of cigarette machines in nightclubs. The facts, at first sight, did not seem as helpful to Mr Upton. He had no other car, saying that he had no real time for a social life and would not use the car on the rare occasions he did socialise. He explained the choice of car partly on the grounds that it enabled him to park in VIP areas outside clubs, which he would not have been allowed to do in a white van, and rejected the suggestion that he had bought it for its 'pulling power' by pointing out that he was in his 60s (an age he shares with Peter Stringfellow ...). However the tribunal, who of course are the only ones who heard the evidence in detail and first-hand from Mr Upton, found him to be  a truthful witness and were satisfied that he did not use the car privately and did not intend to use it privately. Unfortunately for him, on appeal it was held to be available for private use, which was enough to bring it within the disallowance. This decision was upheld by the Court of Appeal.

Implications

So what was the difference between the two cases? The answer is that in Elm Milk the taxable person and the driver are two different people — the company and its director. The decision in Upton hinged on the fact that Mr Upton could not put any barrier in place to stop him driving the car personally; in both cases an attempt to buy insurance that only covered business use proved to be impossible. In the Elm Milk case Mr Phillips had put in place a contract that prevented him from driving the car personally.
So the message appears clear — if you want to get an input tax deduction for a car used only on business trips, you need to incorporate your business if it is not already a company. You then need to pass a board minute, for which the one quoted at length in the tribunal decision might make a useful precedent. You can't use the car even for home to work travel, but if you work from home then there seems to be no problem — nothing in the decision seems to hinge on the fact that the home and business premises are very close but not the same. And all of this needs to be real; you can expect some 'rigorous testing' from Customs and subsequently from a tribunal. Most people will find it hard to meet the test if they don't have access to another car for private use.

Benefit in kind

Paradoxically, of course, what to do with the car has been one of the major problems for the small businesses that have incorporated in recent years. If you drive a large car that you buy new and replace regularly, it was assumed that you either have to accept a very high scale charge, or you buy it privately and accept that the statutory mileage rate will not come anywhere near to meeting the cost of even your business mileage. But what if the car is used only for business purposes?
ITEPA 2003, s 118 says that a car is not made available for private use, and therefore does not give rise to a benefit in kind charge, if the terms on which it is made available prohibit such use, and it is not in fact so used.  There are some differences between this and the position for VAT recovery, which depends on the intention rather than on the actual use, but it seems clear that Mr Phillips should also not be charged on a benefit in kind for his use of the car.
Indeed, why not go one stage further? Mr Phillips said that he needed a large and comfortable car for business journeys in order to arrive fresh and in a fit state to do his job effectively. He also needs a smaller family car for private journeys. Why not have the smaller car as a company car? It doesn't need to be a large and therefore probably high emission car, it can be one which has a low benefit in kind charge. In fact, if it is really fuel-efficient and produces less than 120 g/km of carbon dioxide, the company will be able to claim 100% capital allowances on its purchase .

Home to work

There is still the problem of getting to and from work. It is fine if the business is run from home, or from a nearby office, but what if it is a five mile journey? You might want to idly peruse the recent 'simplification' of the rules for the provision of bicycles for employees, but then again you might not …
An alternative, particularly these days, might be to provide a company motorcycle for private use, which would only attract a 20% benefit in kind charge based on the actual cost of provision rather than the list price new.
Or you could, of course, have a works bus. This is not quite as daft as it sounds (though I admit it gets pretty close). ITEPA 2003, s 242 allows home to work travel to be provided tax-free by an employer if it is a 'works transport service'. That broadly means a service that transports workers to and from work or between workplaces. The vehicle used must be have an actual and legally useable seating capacity of at least nine, but there is no requirement to use all those seats. So the company can buy a large stretch limo seating at least nine people to transport the director in solitary splendour between work and home without a benefit in kind charge.

Get real

Yes, I admit, we're off in the realms of fantasy now. In fact, you may think that the whole idea of having a car solely for business purposes is fantasy, although the amount of VAT alone saved by Elm Milk would have been enough to pay for a small second car.
The person who is treated most unfairly under the current system is the high-mileage business driver. You can't do 50,000 miles a year in a motorised shoebox and expect to perform effectively at your work. High-mileage drivers need comfortable cars, which probably means higher emission cars with a higher list price. They probably drive fewer private miles than most drivers, because the last thing they want to do at the weekend is to get behind the wheel again. Yet they are taxed more than the executive who drives a desk during the working week, and loves to go out for a long drive at the weekend in the — admittedly smaller — company car that he or she has as a perk.

Vasili

For a while it looked as if Mr Vasili might have a partial answer. By having the company transfer to him a partial interest in the car it had bought for him to drive, he argued that the car benefit rules could not apply and he could only be taxed under the general 20% rule for assets. That argument succeeded before the Special Commissioners, but was overturned on appeal to the High Court.
Mr Vasili owned 5% of the car, but used it a lot more than that for non-business journeys. An interesting possibility was raised by the Special Commissioner that would have resulted in no benefit in kind charge at all:

'For example, if the car were jointly owned in equal shares by the employer and employee, and if the car were used equally for the business purposes of the employer and the private purposes of the employee, each would be exercising rights of use proportionately to the ownership rights, and the employer would not be providing a benefit to the employee.'

This was in the context of a charge under the 20% asset rule, having already decided that the car benefit provisions did not apply, and it has been suggested that this fell by the wayside when the High Court overruled the Special Commissioners. I am not entirely sure that the judge intended to do so — he was pointing up what happened when the use was NOT proportional rather than what happened when it was, but there is also a more general point.
We are now meant to interpret legislation purposively. We are told 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 … answered to the statutory description.' (BMBF Ltd v Mawson [2005] STC 1)

What transactions is the statute intended to apply to? The continued use of the term 'benefits' is surely the key — it is intended to apply to transactions which convey a benefit on the employee. But if the employee pays a share of the cost of the car that properly reflects the amount of private mileage as opposed to business mileage, it is hard to see what 'benefit' there has been. If two friends share the ownership of a car and meet the costs in proportion to the amount that each uses it, no-one would consider that one had 'benefited' at the expense of the other.

Conclusion

A purposive construction seems to me to leave the way open to company car drivers with high business mileage and low private mileage to say that they have no benefit in kind if they pay for and own a percentage of the car that equates to the percentage of private use and then meet the same percentage of all the running costs. This must be done scrupulously, and it is probably worth slightly over-estimating private use rather than risk under-estimating.
The Inland Revenue will undoubtedly not agree, and a case would probably need to be taken to the High Court in order to get some authority for this interpretation. But, unless they are prepared to have two separate cars for business and work use, it seems to be the best hope of relief for company car drivers who want nothing more than to be able to drive back home in their company cars after a long gruelling day on the road without being clobbered for an excessive amount of tax.  

Issue: 3997 / Categories: Comment & Analysis