Save content
Have you found this content useful? Use the button above to save it to your profile.
dog looking through car windscreen | accountingweb | Getting NIC car allowance reclaims on the road
iStock_namaki_road_ahead

Getting NIC car allowance reclaims on the road

by

Is HMRC’s guidance on how employees and employers can backdate national insurance relief claims on car allowances workable? In a two-part series, Ian Holloway suggests a solution.

27th Dec 2023
Save content
Have you found this content useful? Use the button above to save it to your profile.

In July, I wrote about the Laing O’Rourke Services Ltd and Willmott Dixon Holdings Ltd vs HMRC case (which HMRC lost). HMRC did not appeal the decision, therefore, national insurance relief must be given at source by way of “disregarding” part of the car allowance from earnings for national insurance (NI) purposes to the extent the employee has undertaken or claimed business mileage that month at less than the maximum 45p a mile.

HMRC’s November 2023 Agent Update and December 2023’s Employer Bulletin explain how employees and employers can backdate relief claims – but is their suggested solution or interpretation of the case actually correct or workable? 

HMRC’s publications speak of relevant motoring expenditure (RME). As discussed with John Messore, managing partner and director from Innovation Professional Services Ltd, this is all expenditure paid by the employer, to the employee, and connected with motoring so, for example, car allowances, any fuel card payments and any mileage payments made to the employee. Collectively known as RME, this is more correctly defined as the aggregate of all other relevant motoring expenditure incurred by the employer.

Intention matters

As explained in the court case, what the employee spends and what they do with the car allowance is irrelevant. It is the employer’s intention that matters.

A qualifying amount (QA) is an amount that qualifies for relief. With income tax, this is the 45p per mile, reducing to 25p where business miles exceed 10,000 in the tax year. For national insurance contributions (NIC) it is 45p, but against total RME.

The case in brief

The Laing O’Rourke Services Ltd and Willmott Dixon Holdings Ltd vs HMRC ruling was all about employees who use their own vehicles for work, are reimbursed by their employer at less than 45p a mile and who also receive a round sum allowance, such as a car allowance, specifically aimed at helping employees to procure and run their own vehicle on business.

The ruling said that the car allowance should be classed as RME, meaning it is eligible for some QA relief. 

The summary

The only amount subject to NIC is RME less QA.

Significantly, therefore, NI relief was available against some or all the car allowances paid, just as income tax relief is available to employees via the mileage allowance relief (MAR) scheme. For income tax there is no limit on the relief since it is against all earnings – whereas for NIC the relief is limited to the aggregate of all relevant motoring expenditure. Also for tax the relief drops to 25p after 10,000 miles but for NIC the relief for cars and vans is always at 45p irrespective of miles driven.

The problem exposed

A problem that will have applied to many employers is that:

  • the car allowance will have been subject in full to employee and employer NIC via the payroll, yet
  • the car allowance is most likely RME and therefore relief (or disregard) should have been given at source for the QA, to the extent the employee undertook business mileage and was reimbursed at less than the 45p maximum rate, so
  • both primary and secondary class 1 NICs, will have been overpaid by virtually every single UK employer. Unless, of course, the employer had also reimbursed business mileage at 45p from the outset (and thereby used up the QA against the milage reimbursement – leaving no QA left with which to offset part of the car allowance, for NIC purposes).

Therefore, given the loss of a tax case and a reversal of their guidance, for years HMRC has misinterpreted a legislative provision leading to overpayments of secondary NIC and over-deduction and over-collection of primary NIC. Employees and employers are entitled to a refund of prior year NIC paid in error and they are entitled to relief going forward. 

In the next instalment, we will discuss correcting the problem, issues with HMRC’s updated guidance and the refund process

Replies (1)

Please login or register to join the discussion.

avatar
By FactChecker
28th Dec 2023 15:14

I'm not aware of any Payroll software that intends to hold/calculate the RME, so good luck to anyone running a Payroll where correct treatment of this relief going forwards would 'be nice'.

But the thought of trying to correct (and so manage the refund processes) for all the ER and EE NIC refund entitlements, from prior year NICs paid in error, is verging on the terrifying.

I look forward to the next instalment, Ian, with my sanity protected by the knowledge that this is now merely of theoretical interest to me. For anyone who is a practitioner, good luck in 2024!

Thanks (2)