Company Cars – Car provided for lower-paid employees

When a company car is provided for the private use of a member of an employee’s family or household, the tax charge normally falls on the employee.  Exceptionally, there is no tax liability on the employee in the following situations.

1. The car is provided in the course of normal family relationships and the car is not accounted for in any way in the employer’s accounts, e.g. a director finances a car personally for his son.
2. The family member is personally liable to pay tax on the car, e.g. a husband and wife both work for the same employer and each of them has the benefit of a car for private use.
3. The family member is a “lower-paid employee”, i.e. earns, including benefits, at a rate of less than £8,500 in a tax year, and
   1. the car is provided because the family member is an employee, and

      equivalent cars are provided to other employees in similar employment with the same employer who are not also

   2. family members in lower-paid employment, and
   3. it is normal commercial practice to provide a car for the type of employment held by the family member.

The last of these three exemption situations tends to be used by couples to avoid company car taxation where, for example, the husband is the company director and the wife is employed part-time as the company secretary.  Whether the exemption applies in such an arrangement generally stands or falls on the last of the three conditions, i.e. on whether it is normal commercial practice for a low-paid, part-time company secretary to be provided with a company car.

This was specifically the case in the decision published by the First Tier Tax Tribunal on 26 April 2010 in the case S Barnard Ltd v Revenue & Customs.  The company, S Barnard Ltd, is a plumbing business.  Mr. Barnard is the sole director and his wife is the company secretary.  Mrs. Barnard was provided with a car with a list price of around £32,000.  She worked hours as required and, despite National Minimum Wage law, was not paid a salary.  The company was assessed by HMRC as being liable to pay Class 1A NICs on the provision of the car and penalties for failing to file a P11D(b) return.  The company appealed against the assessment to the First Tier Tribunal.

The Tribunal established that Mrs. Barnard was a “lower-paid employee” (she had no salary and the taxable value of her car was less than £8,500) and that, because she and her husband were the only employees, the second condition, i.e. the provision of equivalent cars for other employees, could not be met.  Therefore, the only condition in question was the “normal commercial practice” requirement.  It fell to the company to provide evidence of commercial practice and, although the company’s accountant maintained that he was aware of similar arrangements among his clients, he was unwilling (or unable) to provide details due to client confidentiality.  HMRC maintained that, if the practice was as widespread at the company contended, it would have been possible to anonymise the evidence.

As there was insufficient evidence to demonstrate commercial practice, the Tribunal dismissed the appeal, leaving the company liable for both the Class 1A NICs and the related penalty.

A curious and unclear aspect of this case is that, if the company was liable to pay Class 1A NICs because the conditions for exemption were not met, the director was also liable for the tax due on the wife’s car.  There is no indication in the Tribunal’s written decision as to whether or not the tax had been paid.

Further information:

S Barnard Ltd v Revenue & Customs