There has been much press coverage of the tax problems recently encountered by major UK organisations where employees have been able to lease cars on preferential terms under arrangements instigated by their employer. The difficulty arises because section 157 Taxes Act 1998, which deals with the provision of company cars, casts its net extremely widely and it is not only the traditional company car driver who can be caught. Anyone who has a car by reason of his employment is potentially within this benefit in kind charge. The only way to avoid the tax liability is to arrange matters so that the arrangements come within an exemption within the legislation which applies when there has been "transfer of the property".

Most company facilitated leasing, personal contract purchase (PCP) and contract hire plans are outside of this exemption because title in the vehicle is not transferred until the final payment is made.

So how do employers ensure that an unexpected tax liability does not arise? The only certain way at the present time is to either offer a cash alternative and not facilitate any preferential leasing arrangements, or to ensure that the contract under any company facilitated arrangement transfers title of the car at the outset, which probably necessitates a credit sale arrangement (CSA).

This, of course, is often easier said than done as a CSA leaves any third party provider of the car in a more vulnerable position commercially than a traditional leasing or contract hire contract.

Under CSA the typical arrangement usually involves the employer amending the method in which it provides company cars whereby cash allowances are paid to employees who purchase cars from a subsidiary company established to administer the new style arrangements. The cars are still usually sourced and maintained under the same arrangements that applied prior to the introduction of CSA. The employee is liable to income tax and national insurance on the cash allowance, apart from any proportion which may be paid under the fixed profit car scheme in respect of business mileage. However, because full ownership of the cars is acquired at the time the CSA is entered into there has been a "transfer of the property" and so the scale charge does not apply.

So what about an alternative to a CSA where the employer makes available a cash allowance? The employer identifies one or more car leasing companies who will be prepared to offer PCPs to employees on terms identical to those available to the general public and the extent of the employer’s involvement is limited to supplying employees with the contact details of the leasing companies. If an employee leased a car from one of the identified leasing companies it appears possible to argue that, rather than the car being made available by reason of their employment, the employer is merely making available a cash allowance, and that Section 157 should not apply to the employees.

But what if the employer had a group insurance arrangement for cars leased from the preferred supplier, charging the employees a pro-rata amount in respect of the cost of this? Would that fact bring section 157 into play? 

And how about if the employer made administrative arrangements to deduct the monthly leasing costs from the employee’s salary and remit this direct to the leasing company? Would section 157 apply then? 

Finally, what happens if the employee leaves employment. If the contract is genuinely between the leasing company and the employee the car will be retained by the employee who will have a continuing liability for the monthly rentals until the contract expires or an early termination penalty. If the employer underwrites the early termination clause will that bring a liability under section 157? 

This is a complex area and, in view of the proliferation of new plans and arrangements available in the marketplace, clarity is now needed to enable employers to avoid inadvertent problems with the Inland Revenue. Deloitte & Touche have therefore recently written to the Inland Revenue, outlining our understanding of the legislation and Revenue practice in this area in an attempt to obtain a definitive view on the tax treatment. Watch this space for the outcome and in the meantime do not introduce new arrangements without prior clearance of the tax consequences from your PAYE Inspector.