Appeal Numbers: TC/2009/11970

[2010] UKFTT 98 (TC)

TC00409

Appeal numbers: TC/2009/11970

TC/2009/11971

TC/2009/11972

Provision of cars to the directors of the company by way of a leasing agreement between the leasing company and the company giving rise to an income tax charge on the directors for the benefit received and a Class 1A National Insurance Contributions charge on the company - whether a nominee or agency agreement was in existence which provided that the company was the nominee or agent for the directors who leased the cars for themselves so that the charges did not arise – whether if such an agreement was in existence it would have prevented the charges from arising

FIRST-TIER TRIBUNAL

TAX

Stanford Management Services LimitedAppellant

Mr Stephen Readings

Mr John Readings

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (income tax)Respondents

TRIBUNAL: Mrs S.M.G.Radford (Judge)

Mr A.Perrin

Sitting in public at Victory House in London on 11 November 2009

Messrs Lanyon and Kaye, agents for the Appellants and the Appellants in person

Mr Weissand for the Respondents

© CROWN COPYRIGHT 2009

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DECISION

The Appeal

1. The Appeal is against decisions under Section 8 Social Contributions Act 1999 for the tax year 2006/07.

2. The Appellants are Stanford Management Services Limited (“the Company”) and Messrs. S. and J. Readings, directors and shareholders of the Appellant company during 2006/07 (“the Directors”).

3. Messrs. Lanyon and Kaye of the accountants and auditors Thornton Springer LLP (“the Agents”) represent the Appellants.

4. The Directors were provided with motor vehicles by the Company and became liable to income tax on the benefit and the Company to Class 1A National Insurance Contributions (NICs) in the provision of the benefit. The Appellants appealed against this decision.

The Law

Income Tax (Earnings and Pensions Act 2003

Section 114 Cars, vans and related benefits

(1) This Chapter applies to a car or a van in relation to a particular tax year if in that year the car or van—

(a) is made available (without any transfer of the property in it) to an employee or a member of the employee’s family or household,

(b) is so made available by reason of the employment (see section 117), and

(c) is available for the employee’s or member’s private use (see section 118).

(2) Where this Chapter applies to a car or van—

(a) sections 120 to 148 provide for the cash equivalent of the benefit of the car to be treated as earnings,

Section 117 Meaning of car or van made available by reason of employment

For the purposes of this Chapter a car or van made available by an employer to an employee or a member of the employee’s family or household is to be regarded as made available by reason of the employment unless—

(a) the employer is an individual, and

(b) it is so made available in the normal course of the employer’s domestic, family or personal relationships.

Section 118 Availability for private use

(1) For the purposes of this Chapter a car or van made available in a tax year to an employee or a member of the employee’s family or household is to be treated as available for the employee’s or member’s private use unless in that year—

(a) the terms on which it is made available prohibit such use, and

(b) it is not so used.

(2) In this Chapter “private use”, in relation to a car or van made available to an employee or a member of the employee’s family or household, means any use other than for the employee’s business travel (see section 171(1)).

Companies Act 1985

Section 35A. Power of directors to bind the company.

(1) in favour of a person dealing with the company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company’s constitution.

(2) For this purpose:

(a) a person “deals with” a company if he is a party to any transaction or other act to which the company is a party;

(b) a person shall not be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution; and

(c) a person shall be presumed to have acted in good faith unless the contrary is proved.

Section 35B. No duty to enquire as to capacity of company or authority of directors.

A party to a transaction with a company is not bound to enquire as to whether it is permitted by the company’s memorandum or as to any limitation on the powers of the board of directors to bind the company or authorise others to do so.

Section 36. Company contracts: England and Wales.

Under the law of England and Wales a contract may be made:

(a) by a company, by writing under its common seal, or

(b) on behalf of the company, by any person acting under its authority, express or implied;

and any formalities required by law in the case of a contract made by an individual also apply, unless a contrary intention appears, to a contract made by or on behalf of a company.

Section 36A. Execution of documents: England and Wales.

(1) Under the law of England and Wales the following provisions have effect with respect to the execution of documents by a company.

(2) A document is executed by a company by the affixing of its common seal.

(3) a company need not have a common seal, however, and the following subsections apply whether it does or not.

(4) A document signed by a director and the secretary of a company, or by two directors of a company, and expressed (in whatever form of words) to be executed by the company has the same effect as if executed under the common seal of the company.

(5) A document executed by a company which makes it clear on its face that it is intended by the person or persons making it to be a deed has effect, upon delivery, as a deed; and it shall be presumed, unless a contrary intention is proved, to be delivered upon its being so executed.

(6) In favour of a purchaser a document shall be deemed to have been duly executed by a company if it purports to be signed by a director and the secretary of a company, or by two directors of the company, and where it makes it clear on its face that it is intended by the person or persons making it to be a deed, to have been delivered upon its being executed.

A “purchaser” means a purchaser in good faith for valuable consideration and includes a lessee, mortgagee or other person who for valuable consideration acquires an interest in property.

Background and Facts

5. The Directors each wished to acquire new Mercedes cars by leasing. They believed that it was cheaper to do so through the Company.

6. After the Directors had been offered a 3 year lease agreement with DaimlerChrysler Financial Services (“Daimler”) in the name of the Company they consulted Mr Kaye of the Agents.

7. He advised them that if the lease agreement was made in the Company’s name there would be very high tax and National Insurance liabilities given that the list price of each car was £70,000. However if the individuals were charged by the Company with all the costs of the leases then the company was acting as nominee and there would not be the attendant tax consequences. He had consulted with Mr Lanyon , tax manager at the Agents and he had concurred with this advice.

8. The Directors duly went ahead and contracts were made with Daimler for the supply of 2 Mercedes CLS55 four door cars for 36 months.

9. The contracts were in the name of the Company only and signed by the Directors respectively.

10. The Directors did not give personal guarantees.

11. The Directors personally paid all the costs of the cars, such as leasing, petrol, insurance, road tax, repairs and maintenance.

12. The Company was subject to an Employer Compliance Review of its PAYE records on 25 September 2007.

13. The Company’s treatment for tax purpose of cars driven by the Directors was reviewed.

14. The Company paid the monthly leasing instalment each month charging the Directors for the amounts of the instalment exclusive of VAT by way of debits to their loan accounts i.e. directors’ current accounts.

15.The Company reclaimed one half of the VAT input tax charged by Daimler – the vehicles being subject to a 50% input tax restriction as they were made available for private use. Normally VAT on a car is not allowed to be set off against output tax but where a car is leased a 50% claim is allowed if it is used for business purposes (on the assumption that the car will also be used for private use).

16. This was corrected after the review as was the charging of the Directors exclusive of VAT.

17. The car leases and payments were not reflected in the Company accounts but were in the Company’s accounting records.

18. A notice under Section 8 Social Security Contributions (Transfer of Functions etc) Act 1999 for the year 2006/7 was issued to the Company on 16 May 2008 charging Class 1A NICs in respect of the Directors.

19. A closure notice under Section 28A(1) and (2) TMA 1970 was issued to J. Readings on 12 November 2008 showing tax due in respect of a car benefit in amount of £30,246.77. A similar notice was issued to S. Readings on 16 December 2008 showing tax due in amount of £29,819.34.

20. The Appellants’ agent argued firstly that there was a nominee agreement. Alternatively the Directors had acted as agents for the Company. Although the Directors signed the contract there was no indication that they were signing as directors on behalf of the company. Payments were made monthly to the leasing company and payments were made monthly from the Directors bank accounts to the company in reimbursement. Initially the Company incorrectly claimed back 50% of the VAT on the lease payments as though the cars were Company cars and initially the VAT element of the lease payments was not correctly charged to the Directors. These errors were corrected as soon as they were noticed.

21. The Appellants argued secondly the concept of substance over form – in this case the substance of the relevant transaction was that the Appellants had leased the cars, paid for them and were the registered keepers. The cars were not included in the company accounts as assets leased by the company.

22. Finally the Appellants’ agent argued that the moral or common sense point of view was that as the Directors had paid the costs of the cars in full it was nonsensical that there should be a tax liability.

23. When asked in cross-examination, the Directors stated that they had signed the contracts with Daimler as directors of the Company.

24. Had the Company defaulted on the lease payments the leasing company would have had recourse only to the Company and not to its directors. The leasing company were totally unaware of any nominee arrangement.

25. The Respondents submitted that various payments such as Mercedes protection insurance and acceptance fees were not originally reimbursed by the Directors and were only done so when attention was drawn to the omission by HMRC. This indicated that any nominee claim was not operated in practice.

26. The Company reclaimed one half of the input VAT charged by the leasing company demonstrating that the Company was not aware of any nominee agreement and took them to be company cars and therefore eligible for a reclaim of 50% of the input tax.

27. The Respondents contended that an indication that the Company regarded the cars as company vehicles was that it was only charging the Directors the lease charge net of VAT and only reclaiming 50% of the VAT.

28. The Respondents submitted that the Appellants could have paid the lease charges directly themselves.

29. The Respondents submitted that the car benefits legislation was only concerned with facts, not the means by which those facts became facts. Accordingly arguments based on agency or nominee law that the Company was acting as agent/nominee for the Directors were not relevant. The car benefits legislation for income tax applied to the cars provided to the Directors and the Company was liable as a result to pay Class 1A NIC’s.

30. Section 114 ITEPA 2003 applies and states inter alia that the conditions for a benefit to arise are that a car is made available without any transfer of property in it to an employee (or a member of his family or household) by reason of the employment and the car is available for private use and the benefit is not otherwise chargeable to tax.

31. Section 117 ITEPA 2003 states that a car or van made available by an employer to an employee ….is to be regarded as made available by virtue of the employment whether it is or not.

32. Section 118 (1) states that a car made available in a tax year is to be treated as available for the employee’s private use unless in that year the terms on which it is made available prohibit such use and it is not so used and finally Section 118(2) “private use” in relation to a car made available to an employee means any use other than for the employee’s business travel.

33. The Respondents contended that even if a nominee arrangement was in existence it was not properly executed.

Findings

34. The Tribunal found that the Respondents had proved their case. Each element of the legislation was satisfied. Whilst the Directors were straightforward and honest in their evidence they had not made any attempt to execute any agency or nominee arrangement.

35. Daimler could rely on Section 35A and 35B Companies Act 1985 as they were dealing with the Company in good faith.

36. The Company was bound by the contract provided as it was signed in accordance with Sections 36 and 36A of the Companies Act 1985.

37. In considering whether to lease the cars to the Company Daimler looked only to the Company’s credit worthiness. They would only look to the Directors credit worthiness if they called for personal guarantees.

38. The Directors did not pay the leasing company direct and they did not give personal guarantees.

39. If the company defaulted on the payments Daimler would look to the Company for payment.

40. Although it was argued for the Appellants that the Directors would reimburse the Company in the event of a default, in practice neither the Company nor Daimler could enforce payment from the Directors - Daimler because it was not aware of any nominee agreement and the Company because it acted under the will of the Directors.

41. The Directors wanted to acquire the cars through the Company because by doing it this way they would get a better deal. Whilst Daimler denied this in writing to the Respondents, the Tribunal found that based on the Directors evidence this was most likely the case.

42. The Tribunal came to the view that the Directors were used to doing what their agents suggested and followed their instructions as they usually did without a full understanding; hence the mistakes with the reclaiming of 50% VAT and the Company making other payments not originally reimbursed by the Directors such as the Mercedes protection insurance and the acceptance fees. These were only corrected when the Respondents pointed them out.

43. The Tribunal found that the nominee arrangement was not made clear to the Directors or these errors would not have occurred. Equally the Company’s staff dealing with the accounting records appeared not to have been aware of the nominee arrangement.

44. At a meeting with HMRC on 25/09/2007 the Directors appeared to know little about the arrangement stating that they had relied on the advice of their agents.

45. The Tribunal found that other than the oral evidence, there was no evidence that either a nominee or an agency agreement was in existence.

46. There were no notes of meetings of the Directors, no evidence that Daimler was told of the arrangement and no evidence that the Directors informed their staff that these were not Company cars.

47. The Tribunal found that even if there had been such an agreement, the legislation was not concerned with agency or any other law. It stipulated the correct tax treatment to be used when an employer provides a car for its employees. The contract was in the name of the Company, the legislation was satisfied and so a benefit arose.

48. The Tribunal found that the provision of the cars to the Directors fell directly within the provisions of Sections 114, 117 and 118 of the Income Tax (Earnings and Pensions) Act 2003, Cars and related benefits.

49. Furthermore the legislation recognises the possibility of reimbursement of costs by the user of the car and such reimbursement is taken into account in the computation of the benefit.

The decision

50. The Tribunal decided that the appeals are dismissed.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. 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.

TRIBUNAL JUDGE MRS S.M.G.RADFORD

RELEASE DATE: 1 March 2010

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