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Law shifts gear for NIC relief on car allowance

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If employers pay less than the Approved Mileage Allowance Payments and pay a car allowance​, their employees ​(and the employer) are entitled to national insurance relief on the allowance following a 12-year-long campaign. 

26th Jul 2023
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Where an employer pays less than the Approved Mileage Allowance Payments (AMAP), the employee is entitled to Mileage Allowance Relief (MAR). For example, if an employee travels 3,000 miles in their own car and the employer reimburses them at 30p per mile instead of the AMAP value of 45p for the first 10,000 miles, then:

  • AMAP reimbursement is 3,000 @ 45p = £1,350
  • Employer reimbursement is 3,000 @ 30p = £900.

The employee is entitled to tax relief on the difference (£450 in this case). The amount HMRC approves for reimbursement without an income tax consideration is 45p so, if the employer reimburses less than this, HMRC will give income tax relief for the difference. The same relief does not apply to national insurance contributions (NICs) – or does it?

Relevant motoring expenditure

The case of Laing O’Rourke Services Ltd and Willmott Dixon Holdings Ltd vs HMRC in the upper tribunal has relatively simple facts at its core, which apply to both taxpayers, Laing and Willmott Dixon. These companies paid employees a car allowance and reimbursed employees for business mileage in their own car at rates less than HMRC’s AMAPs.

It is indisputable that income tax legislation allows for tax relief in this situation (the MAR scheme). Both Laing and Willmott Dixon challenged HMRC’s decision not to include the value of the car allowance as relevant motoring expenditure (RME). This is defined in the 2001 regulations as any payment to “the employee in respect of the use by the employee of a qualifying vehicle”. The tribunal ruled that the car allowance was RME, as the nature of the payment by the employer was in respect of the use of a car, regardless of whether the employee chooses to regard it that way.

Having the allowance defined as RME is important, as legislation allows an amount to be deducted from this known as the qualifying amount (QA). The same 2001 regulations define a QA, interpreted in HMRC’s guidance as “the maximum amount that an employer can pay to an employee, who uses a privately owned vehicle, in respect of motoring expenses without incurring a Class 1 NICs liability”. Essentially, if RME exists a QA can reduce this as a disregard for NICs, employees and employer.

Successful claims

So the car allowance was RME and the business mileage reimbursement was the QA, therefore, Class 1 NICs is to be applied to the car allowance less the value of the business mileage reimbursement.

Laing and Willmott Dixon were both successful in their respective claims against HMRC’s previous decisions.

Will HMRC appeal? There is the option for HMRC to challenge this ruling in the Court of Appeal. I believe HMRC has little alternative but to appeal, if only to delay this by 18 months or so. 

As to whether there is any chance of success, it’s all in legislation and small wonder HMRC has not changed its guidance in the National Insurance Income Manual, something it is quick enough to do when a ruling goes in HMRC’s favour.

Expert opinion

Innovation Professional Services Ltd are a leading NIC specialist on business mileage and initially brought the claims to court and was the instructing agent for Willmott Dixon. I spoke with John Messore, managing partner and director who commented: “I am delighted with the outcome. Our interpretation of the law and 12-year-long campaign to help taxpayers recover NIC paid in error on business mileage has been totally vindicated.”

Regarding the important parts of a long ruling, unsurprisingly, Messore pointed to schedule 3 of the 2001 Regulations, particularly 7A, which involves the calculation of the QA: “More importantly the law as regards Para 7A has now been clarified by the Courts. Para 7A is a mandatory relief or ‘disregard’, which all taxpayers should now be applying, otherwise arguably they will now be over-collecting NIC deductions from staff.”

Remember that the reduction from 45p to 25p after 10,000 miles does not apply to NICs like it does income tax.

Action for employers

Despite HMRC’s guidance saying otherwise, there is a legislative provision saying employees (and employers) are entitled to NICs relief. If they are entitled but are not getting it, the employee has suffered an unauthorised deduction from wages (the Employment Rights Act and Northern Ireland equivalent). 

Employers do not want employees taking them to tribunal, so:

  • the law says NICs relief can apply in such circumstances 
  • the law also says no deduction can be taken from an employee unless it is statutory, voluntary or contractual, therefore,
  • failing to give the appropriate relief is unlawful.

This ruling sets a binding precedent and employers should consider submitting a protective claim to HMRC. If the employer can support their claim with prior year mileage records, why would they not do this? As Messore says: “I appreciate some taxpayers are sitting on the fence awaiting a possible HMRC appeal. Those companies have lost 12 years’ worth of NIC refund by not putting a claim in back in 2010 and will lose a further two years’ worth of refund for themselves and their staff if they don’t put in a protective claim.”

Cutting through a long ruling and thanks to the above 12-year-long campaign, it’s the law, plain and simple.

Replies (4)

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By More unearned luck
26th Jul 2023 17:41

1. The headline should read "Employers and...". The relief is against secondary AND primary class 1 NIC.
2. "Employers who pay less than the Approved Mileage Allowance Payments and pay a car allowance can get national insurance relief on the allowance – something HMRC doesn’t publicise."

It's odd to accuse HMRC of not publicising a relief that they don't believe is due. Hence, of course, the litigation that is the subject of this article. Even if HMRC accept that the UT is right they can only publicise from now onwards.

3. "The employee is entitled to tax relief on the difference (£450 in this case). The amount HMRC approves for reimbursement without an income tax consideration is 45p so, if the employer reimburses less than this, HMRC will give income tax relief for the difference. The same relief does not apply to national insurance contributions (NICs) – or does it?"

The answer is that the same treatment does not apply for NIC. The UT's interpretation of the NIC rules bring the NIC treatment closer in line to the income tax treatment, but there remain differences. If relief is given by the employer on payday at less than MAP then the employee can't subsequently get NIC relief.

Thanks (2)
Replying to More unearned luck:
Richard Hattersley
By Richard Hattersley
26th Jul 2023 18:41

Thank you for your comment, More unearned luck. The headline has now been updated.

Thanks (0)
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By AK Employment Tax Services
27th Jul 2023 08:24

The summary does not fully cover the implications of this particular Judgement. National Insurance is calculated by reference to earnings periods so if an employee is on a monthly pay then this is the earnings period. An employer would need to take the car allowance payable for that earnings period together with any other relevant motoring expenditure and determine the NIC impact.

The case did not appear to consider that the specific Regulations limit the NIC relief so that once a relevant motoring expense is claimed for an earnings period an additional claim for that period cannot be made. So if these drivers had made claims and in light of this decision a further claim is made it would be interesting to see if HMRC will permit.

So this is a great result and John deserves congratulating there are still questions not answered about the complexities. There is also of course the possibility of an appeal by HMRC against the decision.

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By AndrewV12
28th Jul 2023 08:16

Just reading the above, its unbelievably complicated, possibly designed to be so.

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