Is an employee liable for tax on a company car provided for the employee's family or household member?

The general rule for taxing company cars (or vans) is set out in sections 114, 120 and 154 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). An employee is liable for income tax on the provision of a car or van if

• it is made available to an employee or a member of the employee's family or household,
  
  
• it is made available by reason of the employment, and
  
  
• it is available for the employee's or the member's private use.

In the case of a company van, no liability arises if the private use is insignificant. What "insignificant" means is another matter. The comments below apply also to a company van where its private use is not insignificant.

However, tax liabilities for the provision of a company car or van do not arise if the employee is a lower-paid employee, i.e.

• is not a company director, but
  
  
• has earnings for the year, including the taxable value of the car or van, of less than £8,500.

The general rules means, therefore, that if a company car is provided for an employee (or director) and another car is provided for, say, the wife of the employee, the tax charge for both cars falls on the employee. Both cars are reported on form P11D as if they were both allocated to the employee.

What, though, is the situation if the employee and the member of the employee's family or household (the "family member") are both employed by the same employer? The strict application of the section 114 rules would mean that both are liable for tax on their own car and the other's car!

Sections 169 (for cars) and 169A (for vans) of ITEPA provide special rules to cover this situation. First of all, where both employees are employed by the same employer, they are each charged to tax on their own car and the benefit is reported on separate P11Ds. (Note that different rules apply altogether if one car is shared by two employees.)

However, a complication arises if the family member is a lower-paid employee, and, as a result, any reportable benefits are returned on form P9D. As lower-paid employees are not liable to pay tax on the provision of a company car, a special rule applies to prevent tax avoidance by the device of making a family member an employee and paying a low wage, simply in order to keep earnings below the £8,500 threshold. For example, an employee with annual earnings of £6,000 and a company car with a taxable value of £2,000 would not be liable to pay tax on the car.

For the car not to be taxable on the family member, one of two defined situations must apply, namely,

• the family member must be one of a number of employees doing similar jobs to the family member and who are all provided with equivalent cars on the same terms, i.e. it can be shown that the car is not provided because the employee is a family member but because the job requires it, or
  
  
• it is "normal commercial practice" for a person performing the family member's job to be provided with an equivalent car, i.e. other persons in other businesses doing the same kind of job as the family member are normally also provided with a car.

For detailed guidance on how HMRC interprets the two defined situations, see http://www.hmrc.gov.uk/manuals/eimanual/EIM23070.htm and the following pages.

The example of a company secretary is often quoted to illustrate the second of these two situations. However, it would be difficult for an employer to demonstrate that the job performed by a company secretary in a small company is comparable with that of a company secretary in a large business where it would be normal for a company car to be provided.

Therefore, the answer to the question of whether the provision of a company car for a member of an employee's family or household is taxable on the employee is:

• yes, if the family member is not an employee of the same employer
  
  
• no, if the family member is an employee of the same employer and has an earnings rate of not less than £8,500
  
  
• yes, if the family member is an employee of the same employer, has an earnings rate (including the taxable value of the car) of less than £8,500, and it cannot be genuinely demonstrated that it is normal commercial practice for a person doing the family member's job to be provided with a company car.

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