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HMRC internal manual

Employment Income Manual

Tax treatment of local authority officials and employees: car leasing schemes

Many local authorities have entered into car leasing arrangements with their employees. Under these arrangements the employee is provided with a car for a specified period. In return, the employee has to make a regular monthly payment to the employer or car provider. The car is usually available for private use and employees who, for 2015/16 and earlier are not in an excluded employment (see EIM20007) will be subject to a car benefit charge in accordance with EIM23020.

You should examine carefully the agreement between the authority and the employee before you accept that the employee’s contributions can be deducted from the car benefit charge under EIM25250. Some of the agreements, although providing for a contribution to be made by the employee, do not specify that it is paid as a condition of the car being made available for private use. Without that specific provision, no deduction will be due unless there is strong evidence that, on the basis of the facts, the payment can only be considered to be made as a condition of the car being available for private use, and for that use. The sort of thing that may count as strong evidence is clear information in a staff booklet describing the rules of the scheme.

Some local authorities pay mileage allowances for mileage in provided cars that is regarded as private for tax purposes. In such cases, the car fuel benefit charge will also run.

Many of the agreements provide for the employee to purchase the vehicle direct from the leasing company at the end of the period of lease at less than market value. An employment income charge may arise under Part 2 ITEPA 2003 and the instructions at EIM08001 should be followed.

The contribution made by the employee is normally deducted from monthly salary by the employer. PAYE should of course continue to be operated on the salary before deducting the contributions.