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Benefits in kind and the tax charges upon them often seem to be a cause of some angst for clients. For a start, 'they make the code number look bad!' and their calculation can often seem arbitrary and unrelated to the actual value (if any) that the client perceives himself to have received from, say, the asset's use — or its mere 'availability'. It is therefore perhaps little wonder that clients — and their advisers — seek ways and means of mitigating, or even negating, these charges. Vasili v Christensen [2004] STC 935 was a case in point and it will be recalled (see 'An equitable car scheme?', Taxation, 6 May 2004, page 140) that this case concerned an attempt to get around the motor car benefit in kind legislation and involved the transfer of a 5% interest in the car from the employer to Mr Vasili. And I cannot be alone in thinking that the High Court decision raises more questions than it answers. Furthermore, an important question is whether such machinations are ultimately productive. Perhaps the one thing worse than a client with a tax liability is the client with a tax liability who thought he didn't have a tax liability!
The Vasili case might at least serve as a warning.
A quick spin around the case
TA 1988, s 157 (now ITEPA 2003, s 114) applies where a car is made available '… without any transfer of the property in it'. As there had been such a transfer (the employer had purchased Ferrari and BMW cars for £75,000 and five days later sold 5% shares in these to the employee), it was argued that s 157 could not apply. The Special Commissioner agreed ((2003) SpC 377) and decided instead that the benefit should be assessed in accordance with TA 1988, s 154, based upon the cash equivalent calculated in accordance with TA 1988, s 156(6)(b), i.e. at 20% of the market value of the asset when first applied as a benefit.
At the High Court, Pumfrey J begged to differ. It was clear that when the legislation had been drafted, the possibility of the employee being a joint owner and therefore entitled to the use and possession of the car by virtue of such ownership, had not been contemplated. Pumfrey J however concluded 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 interest upon the employee sufficient to give the employee an independent right to possess and use the asset is sufficient to prevent the car from being “made available”.'
A benefit therefore arose under s 157, with any capital contribution by the employee being dealt with under TA 1988, s 168D (now ITEPA 2003, s 132) which reduces the price of the car for benefit purposes by the amount of the capital contribution up to a cap of £5,000.
Whether 'made available' or not
One reason why the judge could not accept the Special Commissioner's solution of assessment under s 154 was that it did not avoid the perceived difficulty in applying s 157. There was no disagreement that, as joint owner, Mr Vasili was legally entitled to the use and possession of the car. The Special Commissioner had reasoned therefore that the employer had not made the car available. However, the employer had permitted Mr Vasili the use of its 95% interest in the car and that in itself was making available a benefit (but not a car benefit). According to Pumfrey J, if it was right that the car had not been made available to Mr Vasili, then neither was there any question of Mr Vasili being 'permitted' a benefit in the form of the employer's 95% interest in the car (as he was entitled to use and possession by virtue of joint ownership). In other words, s 154 was no more apt than s 157.
The Special Commissioner considered that if an asset were owned 50:50 between the employer and employee, then provided the employee's use of the asset did not exceed 50% no charge under s 154 could arise because the employee was entitled to 50% use of the asset by virtue of his joint ownership.
Pumfrey J commented, however, that s 156(5) (now ITEPA 2003, s 205(1)) appears indifferent to the magnitude of the employee's interest in the asset. This applies in two circumstances where (again, 'without any transfer of the property in the asset'):
a) an asset is placed at the disposal of the employee, family or household; or
b) the employee uses the asset wholly or partly for his own purposes.
Section 156(5)(a) imposes the annual value charge and subsection (5)(b) adds expenses incurred in connection with the provision of the benefit. Subsection (5)(b)(i) refers to '… the expense of acquiring or producing it [the asset] by the person to whom the asset belongs'. Pumfrey J stated that this contemplates that the owner of the asset is one person who is not the employee.
Reason for the High Court's decision
The principal reason which Pumfrey J gives for his conclusion that s 157 did apply is that:
'In their ordinary sense [sic] 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 so as to reduce the “cash equivalent” under s 157.'
He then goes on to consider whether s 168D makes proper allowance for the part of the purchase price paid by Mr Vasili and concludes that it does, albeit capped at an employee contribution of £5,000.
The beginning of the above passage is referring to the words 'without any transfer of the property in it' (the asset). However, presumably by the expression 'in their ordinary sense' in the above quote, the judge means giving an ordinary meaning to the phrase. I am not sure that works. As it happens, we are only talking about a 5% interest, so if I read Pumfrey J correctly — and in an ordinary sense understandable to the 'man on the Clapham omnibus' — the company made the car available. But if the car had been owned 50:50 by Mr Vasili and the company, as supposed by the Special Commissioner, the answer to the question in an ordinary sense is surely 'neither or both'. I do not think that is an answer which the legislation can deal with and therefore we have to question whether Pumfrey J was right in principle. The right answer cannot be that it depends upon the size of the employee's stake in the asset: there is simply no basis in law for any such distinction and the judge does not appear to suggest that the matter is one of fact and in any case no such finding of fact had been made.
Assets other than cars
The legislation regarding the use of assets other than cars and living accommodation is now the residual benefits chapter — ITEPA 2003, Pt 3 Ch 10. Chapter 10 contains no equivalent provision to TA 1988, s 168D and neither was there any such provision in the earlier legislation.
While it seems to me to be questionable whether the legislation, in the form of ITEPA 2003, s 132 (formerly s 168D), does makes proper allowance for the part of the purchase price of a car paid by the employee, it does at least make some allowance. By contrast, no allowance whatsoever is made for the purposes of s 205. Of course, s 205(1) does not use the expression 'made available', but refers to 'an asset ... placed at the disposal of the employee'. The difference in meaning between these two expressions, one would have thought, cannot be great.
Therefore, giving the words their ordinary sense, the construction that the employer placed the asset at the disposal of the employee is not acceptable, taking Pumfrey J at his word and with only a minor variation in context.
The circumstance of an asset being placed at the disposal of an employee is only one of two circumstances where a benefit arises under s 205(1), the other being where the employee does in fact use the asset. Here there can be no question of construction: we are simply talking about actual use. Obviously, where a high-value asset such as a helicopter or a yacht is concerned the aim will be to circumscribe the employee's use of the asset so that it may be argued that it is not placed at his disposal and therefore that the benefit should be based upon actual use. However, that is a digression best left for another article.
Use of the asset
It would seem, therefore, that where an employee uses an asset which he partly owns, he is taxable on a benefit based upon the full cost (if the asset was new) with no allowance for the amount of the purchase price paid by him. Arguably, people who enter into joint ownership arrangements with their employer in order to avoid a benefit in kind should not be surprised if they get their fingers burnt. But that is not the only circumstance where such an arrangement might arise and therefore one would have to say that it is an anomaly. It is not the only one in tax legislation and therefore the advice, to the employee, must be to stay away from such arrangements.
What then of the Special Commissioner's suggestion that if personal use is commensurate with the employee's share in the asset, no benefit will arise? This suggestion was of course based upon the notion that the benefit to Mr Vasili was the private use of the employer's 95% interest in the car. However, as Pumfrey J remarked, what is now s 205(1) seems indifferent to the magnitude of the employee's interest in the asset and does not contemplate that the employee has any interest at all. Perhaps the only way to construe s 205(1) in the way suggested by the Special Commissioner would be if the 'asset' in question were the employer's share in the asset, but that argument seems to founder on the vagaries of joint ownership whereby ' … no equitable or legal tenant in common can exclude any other from possession ...' (Pumfrey J).
Full circle
This brings us full circle back to the words 'without any transfer of the property in it [the car]' in s 114(1)(a). Section 205(1)(b) uses the slightly different peroration: 'there is no transfer of the property in the asset'. The High Court decision in Vasili attempted to dispose of the question of whether the car had been made available by the employer by, some might say, side-stepping the issue and holding that the conferring of any interest in the car does not prevent the car from having been made available. But that depends upon a construction which, perhaps, even the learned judge might have found unacceptable in some circumstances and the question also arises: if the conferring of any interest does not frustrate the application of the legislation, what magnitude of interest would?
As I said at the beginning, Vasili raises more questions than it answers, if indeed it answers any questions at all. It seems doubtful that anyone else will wish to chance their arm at avoiding car benefits by means of joint ownership in future. However, there are many yachts and aeroplanes held in the names of limited companies and I have certainly come across the situation of a boat owned jointly in the hope that if the employee's private use is commensurate with his share of the boat there would be no benefit. In general, I think one would warn clients off company yachts and the like unless there is substantial commercial use of the asset, e.g. for chartering. Clients being clients, though, tend to do these things anyway and to an extent must accept the consequences. However, while I would not hold out much hope for the joint ownership idea, it may be possible to turn Vasili on its head on the basis that since s 205(1) makes no allowance for joint ownership, then if there is any transfer of the property in the asset, the section cannot apply. Undoubtedly this is a counsel of desperation rather than planning advice, but there are certain to be situations where the tax involved may be worth the attempt.
Ken Moody is a tax consultant with Ashworth Treasure chartered accountants and can be contacted by telephone on 01253 794545 or by e-mail to: kenmoody@ashworthtreasure.com.
