In Smallman & Sons Limited, Lisa Garrity & Brian Garrity v HMRC [2021] TC8242, the First Tier Tribunal (FTT) held that Income Tax and Class 1A National Insurance was due on cars leased by the employer company but paid for by the directors using them. There was no carelessness, so the four-year time limit applied and some liabilities and penalties fell out of charge.

Over a period of several years Smallman & Sons Ltd (SSL) had acquired four second-hand cars on lease-purchase agreements.

  • The cars were available to be used by Lisa and Brian Garrity, company directors, and their daughter.
  • SSL recharged all costs relating to the cars to the joint directors’ loan account for Lisa and Brian Garrity. The loan account remained in credit throughout all relevant periods. This arrangement was not documented between the directors and the company.
  • The lease contracts were in SSL’s name as a better finance deal was available to it as a company than to the directors as individuals.
  • The option to purchase under the lease agreements was for SSL but after it paid the option fee to purchase the cars, they were transferred to the directors. No Benefits in Kind were declared by SSL on the cars and Non-company car mileage rates were paid.
  • In 2016 HMRC raised Discovery assessments on SSL for Class 1A NIC’s and the directors for Income Tax together with associated penalties for the years 2011-2017. The assessments were raised on the basis that the six-year time limits for Careless behaviour applied.
  • SSL and the directors Appealed on the grounds that SSL was merely acting as an agent for the directors when it acquired the cars. They also argued that for periods up to April 2016, when the rules changed following the Apollo Fuels case, there was no benefit to the directors as they had paid all costs relating to the cars. The 2016 rule change means that whether or not the terms on which a car or van is made available constitute a fair bargain does not affect whether a Benefit in Kind charge is due.

The FTT partially allowed the appeal. Class 1A NIC’s and Income Tax were due up until SSL paid the option fee to acquire the cars, and where assessments had been issued within the four-year time limit. Penalties issued outside the four-year time limit were discharged.

  • Up to the point where the ownership of the vehicles passed from the lease company to SSL and from SSL to the directors, the vehicles were 'made available' to the directors.
  • There was no evidence of any agency between SSL and the directors or that SSL intended to make the directors liable to the lease finance company for the performance of the contracts it had with it.
  • Unlike in the Apollo Fuels case where the employing company leased the vehicles to the employees at a commercial rate giving the company a small return, here there was some small benefit to the directors albeit at no cost to SSL. That benefit was the better finance rates achieved by leasing through the company rather than personally.
  • The appellants had not been careless. It was not unreasonable to think that no Benefit in Kind would arise on cars they had paid for themselves. As their advisers who dealt with the relevant tax returns were fully aware of the facts surrounding the cars the appellants had taken Reasonable care.
  • As a result, the six-year time limits did not apply and only those amounts correctly assessed within the four-year time limits stood.

Useful guides on this topic

Company cars
Company car tax: How do you work out car benefit? How do you work out car fuel benefit? Are there savings for low-emissions vehicles? How do you reduce car benefit? Cars and the tax tribunals and Top Tax Tips.

Making good Benefits In Kind
From 6 April 2017 onwards, if an employee wants to make good on a non-payrolled Benefit In Kind they will have to reimburse their employer with the cash cost of the benefit by 6 July in the following tax year.

P11Ds: top tips tool kit
Top Tips for employers on preparing form P11D together with a checklist.

Penalties: P11Ds
What are the deadlines for P11D returns? What penalties are due for late or incorrect returns?

Penalties: Errors in Returns and Documents (subscriber version)
What penalties apply if you make an error or mistake? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?

External link

Smallman & Sons Limited, Lisa Garrity & Brian Garrity v HMRC [2021] TC8242


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