EIM23082 - Car benefit: prohibition of private use

Sections 118 and 171(1) ITEPA 2003

Where a car is made available by reason of an employee's employment (see EIM23060 onwards), the legislation provides that it will be automatically treated as having been made available for private use, Section 118(1) ITEPA 2003. This means that a car benefit charge will automatically apply provided the other conditions in Section 114 ITEPA 2003 are satisfied (see EIM23002).

However, there is an escape from this automatic treatment. The car benefit charge will not apply if:

• the terms on which the car is made available prohibit private use and
• it is not in fact used privately.

Note that there are two parts to this test, both of which must be satisfied. The mere prohibition of private use is insufficient on its own to prevent a tax charge. It is also necessary to show that a car is not used for private motoring.

Thus a provided car will result in liability even if no private use is made of it unless such private use has been specifically prohibited in advance (precisely because it is available).

Similarly, even if the director or employee shows that private use of a car has been specifically forbidden there must be no private use of it if a charge is to be avoided.

In some cases it will be quite clear from the facts that private use is prohibited and never takes place. However, you may come across cases where it is less clear that the two parts of this test are satisfied. Where you need to give detailed consideration to whether or not the test is satisfied, you need to ascertain:

• all the facts surrounding the circumstances of the claimed prohibition and
• irrespective of any prohibition, how the car was in fact used.

A key point that you should bear in mind is that it is the tax definition of private use that counts (see EIM23080) and not the employer's. So if the employer bans what it calls private use, but does not include travel between home and the permanent workplace in that ban, it will not be an effective ban for tax purposes.

Guidance from the Courts on prohibition of private use

In the case of Gilbert v Hemsley (55TC419), the taxpayer was an employee of a plant hire company. He was required to be on call at any time and was provided with a company car. He used this to travel between his home and the company's nearby business premises and for genuine business trips. He successfully argued before the Commissioners that:

• he was prohibited from using the car privately
• he never used the car for private motoring.

In consequence, the twin tests imposed by Section 118(1) ITEPA 2003 were met so that no car benefit charge arose.

Vinelott J in the High Court saw no grounds for reversing the Commissioners' decision because of the very special facts as found by them, the essence of which was that:

• his work base was his home and not his employer's premises
• all journeys made by the taxpayer, including those between his home and the company's premises, were therefore business travel and
• in this particular context, where the taxpayer was in essence an ordinary, but senior and trusted employee of the company (he was a director, but had no material interest in the company), the verbal prohibition made by the company's managing director on the private use of the car was valid and enforceable.

Although the decision in this case turned upon the particular facts, it still provides judicial guidance on the factors that need to be present in order to be satisfied that the terms on which the car is made available prohibit private use.

The key principles that emerge from the case are:

• there must be an express ban on private use, that is the ban must be explicitly stated, so that an implied ban is insufficient to meet the test
• there must be a legally enforceable ban on private use.

Provided these factors are present, and depending on the context in which it is delivered, a verbal prohibition may count as an effective and meaningful ban on private use.

Actual private use

Even where it is clear that the employer has imposed what is intended to be a meaningful ban on private use, there will still be a car benefit charge if there was any private use actually made of the car during the year in question.

In the case of Gilbert v Hemsley it was accepted that the car was not used for general social, domestic or pleasure motoring. It was used for travel between home and work, but in the particular circumstances of that case it was accepted that home was a place of work and that travel between the two places of work counted as business travel.

But if the taxpayer's home had not been a place of work, the journey between home and the permanent workplace would not have counted as business travel, and so the car benefit charge would still have applied, irrespective of any ban imposed by the employer.

An Inspector should handle claims that Gilbert v Hemsley applies using the guidance at EIM32170 and EIM32760 onwards as a guide to the circumstances in which journeys from home to a place of work can be accepted as business travel. (This text has been withheld because of exemptions in the Freedom of Information Act 2000)

Demonstrating that there has in fact been no private use

The onus in law is on the taxpayer to demonstrate this. The best way for them to achieve this is to keep contemporaneous records of each journey, including the reason for and details of the journey plus the mileage travelled.

Summary

Both parts of the statutory condition must be satisfied:

• there must be an express, legally enforceable ban on private use, and
• the taxpayer must be able to demonstrate as a matter of fact that there was no private use.