Salary sacrifice car schemes – consumer rights warning

Sullypants

@Alderbank

 completely agree the CRA distinguishes between contracts where title passes goods and contracts where it doesn’t (services/hire). My point is that in a salary sacrifice lease the consumer status doesn’t disappear just because it’s structured as services. The CRA still applies, just under the services chapter rather than goods. The key issue is whether the end user is acting as a consumer, and in my case, that’s beyond doubt.

Okell

Sullypants said:

 ... But from my understanding the CRA makes a distinction: s48 excludes contracts of employment, but not contracts within employment that are about supply of goods/services. Salary sacrifice is simply a payment mechanism, not the essence of my employment...

I would not argue with the logic of that.  Whether it's right or not I don't know...

As regards the contract of employment exclusion, I think all that means is that with respect to a contract of employment, then under the CRA,  the employer can never be a "consumer", and the employee can never be a "trader".  But if the employer supplies goods to the employee that is a sepaarte matter and it is caught by the CRA.

Makes sense to me but I don't know if it's right

Sullypants

@Okell
That’s exactly how I see it. The contract of employment carve out in the CRA is there to stop an employee trying to claim they’re a trader or that the employer is a consumer in relation to the employment itself. But once the employer supplies goods or services to the employee as part of a separate arrangement, like my car, that should be treated under the CRA on its own merits. So really, employment contract isn’t covered but the provision of the car is. I think that’s the important distinction.

i’ll find out if my logic is right or not in coming weeks 😂😂

Grumpy_chap

Okell said:

Why is the contract for the lease of the car a contract for services and not a contract for the hire of goods?

Doesn't the car qualify as "goods" under s2(8) - "... any tangible movable items..."?

And why is the ownership of the car relevant as to whether it qualifies as "goods"?  If you are hiring something it's quite possible that you will never own it - but it would still be a contract for the hire of goods and be subject to the CRA, wouldn't it?

I don't think a lease is a contract for the supply of goods.  It is supplying the service of the use of a car for a defined period of time.

Okell

Grumpy_chap said:

Okell said:

Why is the contract for the lease of the car a contract for services and not a contract for the hire of goods?

Doesn't the car qualify as "goods" under s2(8) - "... any tangible movable items..."?

And why is the ownership of the car relevant as to whether it qualifies as "goods"?  If you are hiring something it's quite possible that you will never own it - but it would still be a contract for the hire of goods and be subject to the CRA, wouldn't it?

I don't think a lease is a contract for the supply of goods.  It is supplying the service of the use of a car for a defined period of time.

I'm not saying your wrong - because I don't know the answer - but why isn't the agreement between the employer and the employee in respect of the car a contract for the hire of goods under s6(1)?

"A contract is for the hire of goods if under it the trader gives or agrees to give the consumer possession of the goods with the right to use them, subject to the terms of the contract, for a period determined in accordance with the contract."

Subject to the employer being a trader for these purposes - which I accept is not a given - what part of s6(1) isn't satisfied here?

I find it difficult to understand why you see a contract for the use of a particular good for a defined period of time to be a "service" rather than being a contract for the hire of that particular good.  What is the difference?


NB - I can sort of see why the hiring or leasing out of a vehicle is in at least one sense the provision of a "service", but for the purposes of the CRA it seems to be that it defined as a contract for the hire of "goods", and not a "service".

But like I said, I don't know what the answer is.  I'm just looking at what the Act appears to be saying.

Grumpy_chap

Okell said:

I'm not saying your wrong - because I don't know the answer - but why isn't the agreement between the employer and the employee in respect of the car a contract for the hire of goods under s6(1)?

I also don't know, but isn't the agreement embedded into the employment contract?
What does the actual agreement say?

Certainly, for the employer, the VAT is assessed for a service not for goods.

Thinking about which, if this was a consumer contract in some way, wouldn't the consumer be liable for VAT?

A_Geordie

I don't think I have anything to add to this than what I've already said. 

Prior to the SS arrangement, the employment contract will be one of service only and in such as case I would accept the CRA does not apply by virtue of s.48.

Upon varying the contract to account for the SS arrangement, the employer is offering a car which is a physical good that meets the definition of goods in the CRA. The employer is also giving possession of the goods under conditions set out in the varied employment contract, now meeting the definition of s6(1). Any service-related elements of the SS arrangement such as insurance, repairs (not involving parts), breakdown cover etc. precludes the consumer from relying on the CRA due to s.48.

The central point to labour is that the CRA expressly prohibited consumers relying on these rights in relation to services under an employment contract but they did not do the same for goods. That requires an explanation and cannot be brushed aside because it is a material omission. That must have been a deliberate act by parliament, or perhaps it was one serious oversight, but that kind of oversight would need evidence so it is unlikely in my opinion that a court would treat it as such.

I have actually done a little reading into this HMRC/VAT point that a number of posters have been banging on about as to why the OP's variation of a contract is a service rather than a supply of goods. As far as I can understand it, the VAT point is solely in relation to how VAT is to be treated (for employer purposes) depending on whether it is a supply of goods or services. 

HMRC views a lease as a supply of service whereas a hire purchase would be a supply of goods, assuming there was an intention to buy at the end of the hire period. It also dictates the way in which VAT is payable by the employer whether upfront or if it is payable by instalments. It also allows an opportunity for the employer to reclaim 50% of the VAT where the car is used for business and personal purposes or up to 100% if business purpose only. 

As I suspected, all of this is a matter for the employer since the contract for the lease is between the employer and the third party supplier. I am not able to find anything in the HMRC rules or any legislation that the treatment of VAT based on a supply of goods or services between an employer and a third party has any bearing at all on the employee's variation of employment contract and that the treatment of VAT under the employer-third party contract must also mean that the variation to the employee's contract to use the car is a supply of services.

If that were true, then it would essentially upend centuries of case law that has treated hire agreements as a supply of goods or supply of goods and services if there are serviceable elements.

The only semi-valid counter argument I can see in all of this is that the variation under the employment contract for the use of the car be under a separate contract in order for it to be treated as a contract for the hire of goods under the CRA. However, neither the definition nor any other provision in the CRA explicitly states that this is required. To counter that, the CRA envisages contracts for both goods and services as a single contractual arrangement and that each of the parts of the CRA will apply to the relevant parts in that contract. This is how the courts previously interpreted contracts under the Supply of Goods and Services Act 1982.

Grumpy_chap said:

Thinking about which, if this was a consumer contract in some way, wouldn't the consumer be liable for VAT?

Pretty certain there are laws on VAT which must be inclusive in a consumer contract, so the price seen is the price paid inclusive of VAT.

Sullypants

A_Geordie said:

I don't think I have anything to add to this than what I've already said. 

Prior to the SS arrangement, the employment contract will be one of service only and in such as case I would accept the CRA does not apply by virtue of s.48.

Upon varying the contract to account for the SS arrangement, the employer is offering a car which is a physical good that meets the definition of goods in the CRA. The employer is also giving possession of the goods under conditions set out in the varied employment contract, now meeting the definition of s6(1). Any service-related elements of the SS arrangement such as insurance, repairs (not involving parts), breakdown cover etc. precludes the consumer from relying on the CRA due to s.48.

The central point to labour is that the CRA expressly prohibited consumers relying on these rights in relation to services under an employment contract but they did not do the same for goods. That requires an explanation and cannot be brushed aside because it is a material omission. That must have been a deliberate act by parliament, or perhaps it was one serious oversight, but that kind of oversight would need evidence so it is unlikely in my opinion that a court would treat it as such.

I have actually done a little reading into this HMRC/VAT point that a number of posters have been banging on about as to why the OP's variation of a contract is a service rather than a supply of goods. As far as I can understand it, the VAT point is solely in relation to how VAT is to be treated (for employer purposes) depending on whether it is a supply of goods or services. 

HMRC views a lease as a supply of service whereas a hire purchase would be a supply of goods, assuming there was an intention to buy at the end of the hire period. It also dictates the way in which VAT is payable by the employer whether upfront or if it is payable by instalments. It also allows an opportunity for the employer to reclaim 50% of the VAT where the car is used for business and personal purposes or up to 100% if business purpose only. 

As I suspected, all of this is a matter for the employer since the contract for the lease is between the employer and the third party supplier. I am not able to find anything in the HMRC rules or any legislation that the treatment of VAT based on a supply of goods or services between an employer and a third party has any bearing at all on the employee's variation of employment contract and that the treatment of VAT under the employer-third party contract must also mean that the variation to the employee's contract to use the car is a supply of services.

If that were true, then it would essentially upend centuries of case law that has treated hire agreements as a supply of goods or supply of goods and services if there are serviceable elements.

The only semi-valid counter argument I can see in all of this is that the variation under the employment contract for the use of the car be under a separate contract in order for it to be treated as a contract for the hire of goods under the CRA. However, neither the definition nor any other provision in the CRA explicitly states that this is required. To counter that, the CRA envisages contracts for both goods and services as a single contractual arrangement and that each of the parts of the CRA will apply to the relevant parts in that contract. This is how the courts previously interpreted contracts under the Supply of Goods and Services Act 1982.

Grumpy_chap said:

Thinking about which, if this was a consumer contract in some way, wouldn't the consumer be liable for VAT?

Pretty certain there are laws on VAT which must be inclusive in a consumer contract, so the price seen is the price paid inclusive of VAT.

I agree with much of what you’ve pointed out, but I’d add a couple of points to explain why I think the CRA/ DISP/FOS access are still valid here.

1. In terms of Goods vs Services under CRA….You’re right that HMRC VAT treatment views leasing as a supply of services, and HP as goods. But the CRA doesn’t follow VAT classifications, it looks at substance and effect. Section 2(8) CRA defines “goods” as “any tangible movable items.” A car provided under hire clearly meets that. Parliament could have expressly excluded hire arrangements within employment contracts, but as you pointed out, they didn’t. Section 48 CRA carves out contracts of employment for services, but it doesn’t do so for goods. That’s a key omission, and I’d argue it was deliberate.

2. Mixed contracts- goods and services as you’ve noted, courts under the Supply of Goods and Services Act 1982 treated mixed contracts as divisible. Goods elements covered by goods protections, service elements covered by service protections. CRA carries that forward. So in a salary sacrifice variation, the car itself a tangible good, remains subject to CRA “satisfactory quality” and “fit for purpose” rules. Service elements (insurance, breakdown, admin) would sit outside by virtue of s.48.

That reading preserves Parliament’s carve out for employment services without accidentally stripping consumers of rights over defective goods.

3. The Regulatory angle, regardless of the technical debate, Arval are FCA regulated and subject to DISP. DISP doesn’t let firms pick and choose which consumers they treat as eligible based on contractual form. It uses the same “natural person acting outside their trade/business” test. That’s exactly what applies to salary sacrifice end users like me.

So I don’t think recognising CRA/consumer rights here upends centuries of case law. It simply applies long established principles ie hire of goods = goods, mixed contracts divisible to a newer salary sacrifice context.

In other words, the VAT treatment tells HMRC how to collect tax. It doesn’t dictate whether consumers lose statutory rights.

Jenni_D

Just a point of curiosity ... if a SS lease is just another way of taking out a lease contract, and the car is only for personal use (not for business use), why is Benefit In Kind tax liable?

A_Geordie

Sullypants said:

3. The Regulatory angle, regardless of the technical debate, Arval are FCA regulated and subject to DISP. DISP doesn’t let firms pick and choose which consumers they treat as eligible based on contractual form. It uses the same “natural person acting outside their trade/business” test. That’s exactly what applies to salary sacrifice end users like me.

I am not sure why you think you have a case against Arval to raise a complaint when you have no contractual relationship with them. That relationship is with your employer and the privity of contract principle applies. If anything, you should be directing a complaint to your employer who is the party that supplied you with the car. Please correct me if I have not understood as I thought the whole debate was about your variation to your employment contract, suggesting the supply is via your employer not Arval.

So I don’t think recognising CRA/consumer rights here upends centuries of case law. It simply applies long established principles ie hire of goods = goods, mixed contracts divisible to a newer salary sacrifice context.

Perhaps you misunderstood my point on this one. I wasn't suggesting that recognising the CRA upends centuries of case law, rather the suggestion that the supply of a vehicle is considered a service would upend centuries of case law because it has always been treated as a good. 

Jenni_D said:

Just a point of curiosity ... if a SS lease is just another way of taking out a lease contract, and the car is only for personal use (not for business use), why is Benefit In Kind tax liable?

Isn't this just the way HMRC have decided things for tax purposes, that everyone pays tax on the value of the benefit?