[2010] UKFTT 282 (TC)

TC00571
	Appeal number: TC/09/14402

National Insurance Contributions (Class 1A) – whether conditions
satisfied for cars to be categorised as pooled cars – Yes – Section 167
Income Tax (Earnings & Pensions) Act 2003.

FIRST-TIER TRIBUNAL

TAX 

	INDUSTRIAL DOORS (SCOTLAND) LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		 TRIBUNAL JUDGE: W Ruthven Gemmell, WS 					 MEMBER:		    Peter R Sheppard, ATII			

Sitting in public in Edinburgh on Tuesday 25 May 2010

Mr Brian Gargaro, for the Appellant

Mrs Christine Cowan, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION
Introduction
1.	This is an Appeal by Industrial Doors (Scotland) Limited (“IDL”) against a decision by the Commissioners of HM Revenue and Customs (“The Commissioners”), by letter dated 3 September 2009, that Class 1A National Insurance Contributions were due for an amount of £17,256.67 in respect of the period from 6 April 2001 to 5 April 2007 inclusive (“period of appeal”) in respect of car and car fuel benefits for two cars.
2.	The issue in dispute is whether the two cars satisfied all five conditions of Section 167 of the Income Tax (Earnings & Pensions) Act 2003 (“ITEPA”) to categorise them as pooled cars. IDL’s grounds of appeal are that they do not accept nor agree that they are liable to pay Class 1A National Insurance Contributions for car and car fuel benefits as, in their view, they have satisfied all five conditions for pooled cars.  The Commissioners contended that IDL have not met the conditions.
3.	Essentially, the issue in the Appeal is whether, on the facts, IDL satisfied all the five conditions set out in Section 167.
Legislation
Section 116 ITEPA - Meaning of when car or van is available to employee -
(1)     For the purposes of this Chapter a car or van is available to an employee at a particular time if it is then made available, by reason of the employment and without any transfer of the property in it, to the employee or a member of the employee's family or household.
(2)     References in this Chapter to—
(a)     the time when a car [or van] is first made available to an employee are to the earliest time when the car [or van] is made available as mentioned in subsection (1), and
(b)     the last day in a year on which a car [or van] is available to an employee are to the last day in the year on which the car [or van] is made available as mentioned in subsection (1).
(3)     This section does not apply to section [124A or] 138 (automatic car for a disabled employee).
Section 118 ITEPA - 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)).
Section 167  ITEPA - Pooled cars –
(1)     This section applies to a car in relation to a particular tax year if for that year the car has been included in a car pool for the use of the employees of one or more employers.
(2)     For that tax year the car—
(a)     is to be treated under section 114(1) (cars to which this Chapter applies) as not having been available for the private use of any of the employees concerned, and
(b)     is not to be treated in relation to the employees concerned as an employment-related benefit within the meaning of Chapter 10 of this Part (taxable benefits: residual liability to charge) (see section 201).
(3)     In relation to a particular tax year, a car is included in a car pool for the use of the employees of one or more employers if in that year—
(a)     the car was made available to, and actually used by, more than one of those employees,
(b)     the car was made available, in the case of each of those employees, by reason of the employee's employment,
(c)     the car was not ordinarily used by one of those employees to the exclusion of the others,
(d)     in the case of each of those employees, any private use of the car made by the employee was merely incidental to the employee's other use of the car in that year, and
(e)     the car was not normally kept overnight on or in the vicinity of any residential premises where any of the employees was residing, except while being kept overnight on premises occupied by the person making the car available to them.

4.	Section 8 of the Social Security Contribution [Transfer of Functions Etc.] Act 1999 and Section 10(1) of the Social Security Contributions and Benefits Act 1992 allow for decisions to be made in relation to, and for the payment of, Class 1A National Insurance Contributions and there no need to set them out here.
The Facts
5.	From the evidence before the Tribunal, the following facts were found:- 
6.	IDL is a company based at 199 Broughton Road, Edinburgh whose business is supplying and fitting industrial doors and security systems.
7.	During the period of appeal, Mr Antony Gargaro was the fulltime managing director until some date in 2005 and between 2005 to 2007 continued in this role working on Tuesdays and Fridays and intermittently on other working days.  Mr Antony Gargaro who died in July 2007 was a sixty per cent shareholder of the business and Mr Brian Gargaro, who represented IDL at the hearing, and who gave evidence and who was a director of the Company, owned, until that date, forty per cent of the share capital.
8.	It was clear throughout the handling of this matter that a number of errors had been made by the Commissioners which resulted in an original Section Notice being withdrawn on the grounds that it was not valid in law.
9.	Similarly, surveillance reports in relation to 14 to 16 July 2008 and 4 to 8 August 2008 were presented to the Tribunal which covered Mr Brian Gargaro, his home and IDL’s premises in 2008 which were outwith the period of the appeal.
10.	The Tribunal had before it “affidavits” or witness statements of Mr Brian Gargaro, Director of IDL and Ms Gail Susan Gray and Mr Michael Murray, both employees of IDL.  Mr Brian Gargaro and Ms Gray gave evidence, were examined and cross examined and both were credible.
11.	There was no agreed statement of facts.
12.	The Commissioners wrote on 5 July 2007 intimating that they wished to call on IDL’s business premises to review their records and requested that IDL complete a fact finding questionnaire.  The details of what was required in the questionnaire and the reasons for this were explained in the Commissioners’ letter of 12 July 2007.
13.	The questionnaire was dealt with by correspondence and an extract of this was produced to the Tribunal.
14.	During the period of appeal the vehicles which were the subject of the appeal were a BMW 5 Series replaced by a BMW 6 Series both with the registration number 8BG, a number plate that belonged to IDL, and a Toyota Land Cruiser with the registration number SO53 EOL, replaced by the Volvo XC940 with the registration number SK56 WDN (“the cars”).
15.	The questionnaire asked how many pooled vehicles there were and the answer was shown as “two cars and four vans”.  In relation to the questionnaire, it was clear that there had been a misunderstanding with the cars and the vans and what they were.  It was clarified that there were only two pooled cars at any one time.
16.	It was explained in evidence that there was sufficient parking at or near the business premises of IDL for parking the cars.
17.	It was noted in evidence that the cars were from time to time taken home overnight by employees particularly where they required these to start the next working day making a journey which would make more sense to start from their home rather than from the parking area for the cars.  For instance, if an employee who lived in Fife was travelling to Aberdeen for work, it would make sense to take a car home to Fife and start the journey to Aberdeen from there rather than return to Edinburgh and then start the journey to Aberdeen.
18.	Ms Gail Gray and Mr Martin Murray had been employees of IDL for over ten years.
19.	Insurance certificates for vehicle registration number 8BG, covering the period 28 February 2006 to 2007 (the BMW vehicle), and for vehicle SK56 WDN (“the Volvo vehicle”) from 1st December 2006 to 28 February 2007 and 28 February 2007 to 28 February 2008 were submitted.  These also showed that the permitted drivers were “the policyholder” (IDL) and “any person who is driving on the policyholder’s order or with his permission provided the driver holds a licence to drive the vehicle or has held and is not disqualified for holding such a licence”.  In evidence, it emerged no driving licences of any of the drivers of the pooled cars were checked by IDL.
20.	The insurance policies stated the limitations to use being social, domestic and pleasure purposes and in connection with the policyholder’s business.
21.	Affidavits signed by Mr Brian Gargaro, Ms Gail Gray and Mr Martin Murray, all dated 26 August, stated that the “historical arrangements and practices” for IDL in relation to IDL’s pooled car arrangement.  These affidavits stated that “on joining the company, Mr A Gargaro explained the terms of employment which included the pooled car system.  The pooled car system applied to every employee and pooled cars were made available to each employee for business travel purposes only.  The use of pooled cars for private purposes was strictly forbidden”.  The company would ensure the cars were insured for the use of employees during business use only; the pooled cars would be parked in or near the company’s premises in the evenings unless on a rare occasion the car would be required by an employee first thing on the following day.  The pooled cars were not to be used by one employee to the exclusion of another”.
22.	In evidence, Mr Brian Gargaro and Ms Gail Gray confirmed the terms of these affidavits.
23.	An invoice for the Toyota Landcruiser dated 9 November 2005, for an amount of £275.58 in relation to a 20,000 mile service, showed the invoice being made out to Mr Brian Gargaro’s wife at her home address with the customer shown as IDL.  The Toyota vehicle had been serviced at the Western Toyota Sighthill garage.  Mrs Gargaro was not an employee and it was stated she had picked up the vehicle as a matter of convenience and, as she had no company credit card, used her own credit card which was why her name appeared on the invoice.  
24.	Mr Gargaro gave evidence that all employees had their own cars and in many cases could and would also use vans.
25.	A number of other issues had been raised by the Commissioners and these had been accepted and settled by IDL.  
26.	Mr Gargaro’s job, between 2001 and 2007, included responsibility for site surveys which involved travel throughout Scotland, particularly in relation to the coastguard stations where the company was involved in providing services.  Mr Gargaro made visits to the North of England and throughout Scotland.  There are 49 coastguard stations with the most northerly being in the county of Sutherland, the most westerly in the county of Dumfries and the most easterly in Berwick.
27.	The reason given for having the pooled BMW car was that it was more comfortable for longer distances and in winter the “4 x 4” vehicles, the Toyota and the Volvo, were used as a result of the quite often poor weather conditions.  In addition, the “4 x 4” cars could be used to pick up parts.  It was explained that the parts would often be electronic parts and, accordingly, could be accommodated in a car rather than scaffolding which would require one of IDL's vans.  
28.	Mr Gargaro and Ms Gray regarded the ability to use a BMW or a Volvo motor car as a ‘perk of the job’ and these were more pleasant to drive than a van.  Ms Gray also used the vehicles to chase up debtors by making personal visits and to visit the post office or the banks which either were reasonably local or some miles away in the city centre.
29.	The vehicles were also used to survey jobs, particularly by Mr Murray, but he also had a van as well for installing or servicing doors.
30.	There was no documentation kept by IDL in relation to the use of the pool cars by members of staff.  The keys to the pooled cars were kept in a cupboard in the company’s business premises.  No mileage logs were available to show the amount of use of the pooled cars and Mr Brian Gargaro explained that no written procedures or logs of any kind were in place.
31.	In evidence, Mr Gargaro advised that on occasions the cars would be taken home for the evening so that they could be used first thing the next day.  Mr Gargaro estimated that he would do this one to two times a month.
32.	Similarly, Mr Gargaro estimated that his personal credit cards were used for purchasing fuel once or twice a month.  Mr Gargaro stated that he would often take one of the cars home for lunch as he would be visiting important clients which were nearer his house rather than nearer the offices.  On occasions he would refuel the car before or after lunch.
33.	Mr Gargaro explained that the company had changed its policy on the two pooled cars so they became company cars following the Commissioners’ investigation and what Mr Gargaro’s accountants claimed was a change in the law.  Mr Gargaro did not accept the comments by the Commissioners that the change of policy indicated an admission of guilt.  
34.	A calculation, which was not challenged, of the Class 1A National Insurance Contributions due totalling an amount of £17,256.67 was before the Tribunal showing the Class 1A National Insurance Contributions due on the BMW and Toyota cars for the period 2001/2002 to 2006/2007.
35.	Prior to the Hearing before the Tribunal, no access had been given to HMRC to question the employees in relation to the Affidavits.
36.	The Commissioners stated that there were four vans and two cars for six people who were on the payroll.  The Commissioners submitted P35 forms for the years 2005/2006 and 2006/2007 together with P14 forms to which they refer as, evidence that there were six employees.  No written evidence was submitted as to the number of employees prior to 2005/2006.  Mr Brian Gargaro stated that there were eight employees, at least during the period 2005/2006.
37.	Ms Gray gave evidence that cars had to be returned to the company offices by 5pm and that private use of the vehicles was strictly prohibited.  Mr A Gargaro had been a “ruthless employer” and would not allow private use.  In both Mr Brian Gargaro’s and Ms Gray’s opinion, anyone who did so would be dismissed from their post, although Ms Gray knew of no actual instances of this.
38.	Ms Gray gave evidence that she was told that there were pooled cars when she joined the company approximately ten years ago, confirmed that there were no files or no records as generally there were only four people in the office.  Ms Gray confirmed that she was not told at the outset of her employment about the conditions of use of pooled cars but only after a number of years.  Ms Gray confirmed that when she used a car it would normally be topped up with fuel by Mr A Gargaro or Mr B Gargaro using a company credit card.  RAC cover was in place in event of a breakdown.
39.	Ms Gray stated that she had not been told of any details of the change in the car policy from the pooled car policy to the company car policy, she had not been told of any details of the change but knew that it was as a result of the HMRC investigation and as a result of IDL speaking to their accountants.
Authorities
T Haythornthwaite & Sons Limited v Kelly, Court of Appeal, 24 January 1927
Gilbert v Helmsley, High Court of Justice (Chancery Division), 9 July 1981
IDL’s Submissions
40.	IDL said that the cars were pooled cars, were not available for private use and met the conditions of Section 167(3) of the ITEPA 2003.
41.	IDL said that the cars were made available to and actually used by more than one employee; that the cars were insured for all employees and not any named drivers and that, confirmed by the affidavit, the cars were available and actually used by the staff.  IDL claimed there were eight persons on the payroll all of which were authorised to use the two cars.
42.	IDL said that the cars were made available in the case of each employee by reason of their employment; as evidenced by the affidavits signed by Mr Brian Gargaro, Ms Gail Gray and Mr Michael Murray.  IDL understood there was no legal requirement to keep any records and due to the small size of their company did not feel it necessary to do so.
43.	IDL said that the pooled cars were not ordinarily used by one employee to the exclusion of others stating that this was also proven by the affidavits and the evidence given to the Tribunal.  IDL claimed that on one occasion, Mrs Brian Gargaro had gone to collect the Toyota vehicle from Western Toyota as they did not offer a collection or drop off service and as IDL had not yet opened an account with them they would not release the vehicle so that Mrs Gargaro, who was not an employee nor a shareholder of IDL, paid for this by using her personal credit card with the consequence that her name was on the invoice.
44.	IDL maintained they met the conditions on private use by employees being merely incidental to their use; by means of the prohibition on private use, again evidenced by the submissions to the Tribunal and the affidavit.  IDL say that on rare occasions the cars were kept overnight for an early start or emergency callout.  Accordingly, IDL said that they met the condition that pooled cars are not normally kept overnight on or near the residence of any of their employees.  IDL claimed that the vehicles were normally kept overnight on their premises.
45.	IDL said that of the fuel purchases on the company credit card made to service stations near Mr Brian Gargaro's home address, approximated only 17% of the total time the car was refuelled, meaning that 83% of the time, the fuel was purchased from stations throughout Edinburgh and Scotland and consequently at a petrol station outwith two miles from Mr Brian Gargaro’s home.
46.	IDL said that the use of a BMW or a Toyota/Volvo, in the event of a van being unavailable, was appropriate and sensible, particularly with the Toyota/Volvo cars being four wheel vehicles and particularly useful in the winter for emergency callouts.  IDL claimed that using a car was more economical than using a heavy van filled with stock and plant.  IDL claim that the BMW was used for administrative duties and also made available as an incentive or a perk but for business use only.
47.	IDL cited the case of Gilbert v Helmsley a case in relation to the private use of a motor vehicle as authority for their claim that a verbal prohibition against availability of private use was sufficient.
48.	IDL claim that the tests set out at Section 167 of ITEPA 2003 had been met, that documentary evidence was not required merely suggested and that the Appeal should be allowed.
The Commissioners’ Submissions
49.	The Commissioners said that the tests and all the conditions at Section 167 of the ITEPA 2003 had not all been met as to categorise the pooled cars as such.
50.	The Commissioners said that no contemporaneous records were maintained of meeting the five conditions, that the affidavits signed on 26 August 2008 by Mr Brian Gargaro, Ms Gail Gray and Mr Michael Murray were not sufficient evidence to show that the practices had indeed been enforced during the period of appeal.
51.	The Commissioners said that IDL must demonstrate they had complied with the conditions and do not accept that a statement that the employees’ ‘word is their bond’ is sufficient.
52.	The Commissioners said that the oral agreements were not conclusive as prior to the hearing they had not had an opportunity to question the employees.
53.	The Commissioners said that IDL cannot prove that the policies were adhered to as there is no evidence other than the written statements of compliance.
54.	The Commissioners did not see any similarities between the case of Gilbert v Helmsley which related to a specific prohibition relating to the private use of cars although the Commissioners stated that the tests for availability for private use at Section 118 of ITEPA 2003 was the same as the Finance Act 1976 legislation cited in Gilbert v Helmsley.
55.	The Commissioners said that in IDL’s case, meeting the prohibition is not sufficient and instead IDL needed to show that there has been no private use.  In the Helmsley case, the tax payer proved that he had not actually had any private use.  This was not the case with IDL.
56.	The Commissioners said that a ban on private use must be enforceable and capable of being implemented by disciplinary action if it is not; that the employee was a senior director and that disciplinary action was not a relevant consideration in relation to the instructions he was given as regards private use.
57.	The Commissioners referred to T Haythornthwaite & Sons Limited as authority for the proposition that a Tribunal is ‘to hold an assessment standing good unless the Appellant established by evidence satisfactory to them that the assessment ought to be reduced or set aside’. 
58.	The Commissioners stated that the burden of proof was on the balance of probabilities; in their view the cars were not pooled cars, that the use of high prestige cars was not usual for pooled vehicles; that there were no written monitoring systems; that there were no written arrangements with employees in relation to pooled cars and that it was surprising to see an invoice addressed to Mrs Gargaro who was neither an employee or a director.
59.	The Commissioners said that although the cars may have been made available to employees there was no evidence that the cars had been made available for use; that any ban on private use was not legally enforceable as there was no contractual document to allow enforcement; that there had been a failure to demonstrate that there was no exclusive use of the vehicles; there were no journal logs or records showing use to prove any private use was merely incidental and, similarly, there were no written logs to prove that vehicles were kept overnight.
60.	The Commissioners say that IDL has not discharged the onus of proof and that the Appeal should be dismissed.
The Tribunal’s Findings
61.	The Tribunal considered the evidence and submissions in relation to the five conditions set down at Section 167 ITEPA 2003 in relation to pooled cars.
62.	The period of appeal covers the period 2001/2002 until 2006/2007 in relation to the ITEPA Act 2003 which came into force on 5 April 2003.  No reference was made in the Statement of Case by the Commissioners of the legislation in place prior to April 2003 which would be referable to the period 2001/2002 and 2002/2003.
63.	The computation attached to the Commissioners’ letter of 11 January 2008 attached a computation showing the Class 1A National Insurance Contributions due of £17,256.67.  Throughout it refers to a Toyota car being owned in 2006/2007 yet the Toyota car was sold and replaced by a Volvo car on 30 November 2006.
64.	The only written evidence before the Tribunal relating to the years 2001/2002, 2002/2003 and 2004/2005 was IDL’s Affidavit which although not specific as to date, confirmed “the following historical arrangements and practices to be true”.  It confirmed that during the periods of their respective employments with IDL the same arrangements “were applied and practised by each of us”.  In evidence, it therefore covered the period of appeal in relation to Mr Brian Gargaro and Ms Gail Gray who had been employees since 6 April 2000.
65.	The Commissioners’ written evidence related predominantly to 2005/2006 and 2006/2007.
66.	The Tribunal noted that there was no dispute that Class 1A National Insurance Contributions were due in relation to cars which failed to meet the pooled car test; the issue was whether on the balance of probabilities the conditions at Section 167 of ITEPA 2003 had been met.
67.	The Tribunal found the evidence given by Mr Brian Gargaro and Ms Gail Gray to be credible and understandable in relation to an organisation the size of IDL.
68.	The Tribunal had sympathy with the Commissioners’ contention that the need for two pooled vehicles of the cost and standard of car available for a relatively small number of staff was unusual but the Tribunal did not find this in itself a sufficiently strong factor to find that the tests had not been met.
69.	The question related to whether what was said and signed in the affidavit by the three employees, one of whom Mr Brian Gargaro was a director, and during the period of appeal a 40% shareholder and subsequently the 100% shareholder, was sufficient evidence to meet the tests when seen against the guidance of the Commissioners set out clearly in their HMRC Booklet 480 at Chapter 15.1 which clearly states that “employers need to be able to demonstrate that the conditions for the car or van to be a pooled vehicle have been met, for instance, by keeping mileage records to show when the car was used, by whom and for what journeys”.
70.	As regards meeting the test, this is the fundamental issue at stake and whereas it is clearly best practice to have records such as those suggested by the Commissioners, these are suggestions and are not part of the statute.
71.	The Tribunal were not referred to any case law which extended the statutory definition to show that written evidence was a requirement of meeting the test and, accordingly, were of the view that in itself this would not be a sufficient reason to dismiss the appeal.
72.	The Tribunal felt that in a small environment, in a small office with a few employees, control of the pooled cars could be achieved without formal written rules although best practice and to avoid doubt those records should be maintained.  Insurance was in place and parking space was available and appropriate for a pooled car arrangement.  The nature of IDL’s work was consistent with journeys from time to time starting at employees’ homes rather than from IDL’s premises.
73.	Detailed enquiries of IDL were undertaken by the Commissioners concluding in 2001 with no changes or adjustments required in respect of the pooled car arrangements which were in terms of the signed affidavit, the same then as between 2000–2001 until 2006–2007.
74.	Whereas the Commissioners produced surveillance evidence, the Commissioners accepted that this was not relevant to the period of appeal and therefore was not helpful in rebutting the written statement and evidence given to the Tribunal that the conditions of Section 167 ITEPA 2003 had been met, albeit that no records were kept.
75.	In the absence of any such evidence, the Tribunal accepted the evidence of IDL and the appeal is accordingly allowed.

W Ruthven Gemmell
TRIBUNAL JUDGE
RELEASE DATE: 17 June 2010