This month’s Chartered Accountants Tax Case digest looks at a UK Court of Appeal case which examined the classification for benefit in kind tax purposes of three types of modified crew-cab vehicles. The case first began in 2017.

The case is the latest episode in a long-running series seeking to establish the difference between cars and vans. The classification is important because the cash equivalent of the benefit of a van and a car, both of which are defined statutory terms, are calculated differently.

Although the calculation is based on several factors, including the vehicle’s emissions, in general, if a vehicle falls within the definition of a car the benefit and, as a result, the tax levied, is greater than if it were a van.

The Court held that the vehicles in question are cars rather than vans. As many thousands of these vehicles are provided to employees in the UK and many other vehicles share their attributes, the case has potentially significant, costly and far-reaching consequences for both employers and employees.

As a Court of Appeal decision, the outcome is binding. However, it is not clear if a further appeal to the Supreme Court can be made by the taxpayers involved.

Background

The appeals in front of the Court were concerned with the classification of the Vauxhall Vivaro (the “Vivaro”) and the first and second generations of VW Transporter T5 Kombi van (the “Kombi” or “Kombis”) for the purposes of taxation.

The vehicles were provided by Coca-Cola European Partners Great Britain Limited (“Coca-Cola”) to its employees for use in their work and for their own private purposes meaning a taxable benefit in kind arose on the cash equivalent of the benefit which is treated as earnings from employment subject to income tax and national insurance. The question at the heart of both appeals was whether the vehicles in question were “goods vehicles”.

The taxpayers claimed the vehicles to be goods vehicles under section 115(2) ITEPA 2003. HMRC did not agree and argued that the vehicles were not goods vehicles but cars and as such, should be subject to the company car rules. All of the vehicle types have two rows of seats and a payload of greater than one tonne.

The First-tier Tribunal (“FTT”) decision held that the Kombis were cars but that the Vivaro was a van. It said the Vivaros should be classed as vans because of the significant cargo space available in the middle section. However, the Kombis were equally suitable for carrying goods and passengers so did not constitute goods vehicles. The Upper Tribunal (“UT”) upheld the FTT’s decision. Both parties appealed.

The relevant legislation is the Income Tax (Earning and Pensions) Act 2003 (“ITEPA”) Section 6(1)(a) of which imposes a tax on “general earnings”, which is defined to include “earnings” and “any amount treated as earnings”. Taxable benefits, set out in the benefits code, are treated as earnings.

The benefits code dealing with cars, vans and fuel is at Part 3, Chapter 6 ITEPA 2003. It applies where a car or van is made available to an employee by reason of employment and is available for the employee’s private use (section 114(1)).

The “cash equivalent” of the benefit of the car or van is to be treated as earnings and is calculated differently depending upon whether the vehicle is a car or a van (sections 120 and 121; and sections 154 and 155). There is also a corresponding charge to Class 1A NICs in section 10(1) of the Social Security Contributions and Benefits Act 1992.

The provision with which these appeals was directly concerned is section 115 ITEPA 2003. So far as is relevant, it provides as follows:

“115 Meaning of “car” and “van” (1) In this Chapter— “car” means a mechanically propelled road vehicle which is not— (a) a goods vehicle, (b) a motor cycle, (c) an invalid carriage, or (d) a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used;

“van” means a mechanically propelled road vehicle which— (a) is a goods vehicle, and (b) has a design weight not exceeding 3,500 kilograms, and which is not a motor cycle.

(2) For the purposes of subsection (1)— . . .

“goods vehicle” means a vehicle of a construction primarily suited for the conveyance of goods or burden of any description;.

The Taxpayers appealed the UT Decision in relation to the Kombis on two grounds.

• The UT failed to apply the test imposed by statute and based its decision on the use of the interior of the vehicles rather than on their construction as a whole; and
• If the UT was right to adopt the same approach as the FTT in examining the internal disposition and use of the vehicles while placing little significance on the structure as a whole, it made an error by reaching a conclusion predicated on errors of law and fact, failed to consider Keeble v Miller [1951] and misconstrued the FTT’s reasoning at paragraph 161 of the FTT Decision.

HMRC sought to uphold the UT Decision that Kombis are not “goods vehicles” on the basis of three additional reasons to those given by the UT.

1. That the wording used in the UT judgment of “primarily suited” imports a requirement that suitability be more than marginal;
2. The UT was wrong to hold that the FTT had erred in concluding that the front row of a Kombi 1 was primarily suitable for carrying passengers (including the driver) because the presence of a seat for the driver could not point to suitability for passenger transport; and
3. The UT was wrong to find that the FTT had made a typographical or drafting error when stating that “the rear section [of the Kombis] was “primarily suitable” for the carriage of goods”.

Decision

The Court held that in respect of the taxpayers’ first ground of appeal in relation to the Kombis, neither the FTT nor the UT failed to construe section 115 and the definition of “goods vehicle” correctly in the way suggested. Furthermore, neither the FTT nor the UT erred in their approach to the construction of the Kombis in the way which Mr Gardiner submitted they had. The FTT was right to reject the approach adopted in the Timothy Jones case and to take account of the flexible layout of the Kombi and the removable seats.

HMRC’s first and third grounds of appeal in the Vivaro appeal succeeded. It was not sufficient, as both the FTT and the UT had held, to conclude “on a narrow balance” or by a “fine margin” that a vehicle’s construction is “primarily suited for the conveyance of goods”. Furthermore, the UT was wrong to hold that the FTT’s application of a “typicality” test did not lead it into error.

Overall, the Court of Appeal determined that all three vehicles are multi-purpose vehicles, capable of carrying both goods and people. This made them not ‘van-like’ enough. As a result, they were not goods vehicles.

The full judgment in this case is available from – https://www.judiciary.uk/wp-content/uploads/2020/07/HMRC-v-Payne-Ors-Approved-Judgment-002.pdf