SE23082 - Car benefits: prohibition of private use

Section 168(6)(a) ICTA 1988, Section 168(5)(c) and (f) ICTA 1988

Where a car is made available by reason of an employee's employment (see SE23060 onwards), the legislation provides that it will be automatically treated as having been made available for private use. This means that a car benefit charge will automatically apply provided the other conditions are satisfied (see SE23002).

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

• is specifically prohibited from using the car privately, and
• does not in fact use it privately.

Note that there are two parts to this test. 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.
• 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:

• it is the tax definition of 'private use' that counts (see SE23080) - not the employer's. So if the employer bans 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 168(6)(a) ICTA 1988 were met so that no 'scale 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 turns 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 an enforceable ban on private use, that is it must be meaningful and underpinned by the possibility of disciplinary action if the prohibition is disobeyed
• 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 years 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 instructions at SE31800 onwards, SE32350 onwards and SE32000 onwards as a guide to the circumstances in which journeys from home to a place of work can be accepted as business travel. Where it is considered that arrangements have been contrived to obtain the benefit of the decision, consult Employment Income Technical