NICs on Car Allowance Payments

Where employees use their own vehicles for business travel, limited exemptions from both PAYE income tax and Class 1 NICs are provided in the relevant legislation.  Mileage payments are not liable for tax and NICs where the payments do not exceed a threshold value, calculated by multiplying the business mileage by a statutory mileage rates:

• for tax purposes, 45p per mile up to 10,000 miles per annum and 25p per mile for miles over 10,000 in a year, and
• for NICs purposes, 45p per mile.

These rates are included in HMRC’s definition of Relevant Motoring Expenses (RME) – i.e. expenses that attract a relief from a tax or NICs obligation.  In the case of NICs, HMRC’s guidance further defines RMEs as including any regular or one-off lump sum payments, as long as the payments are paid for use of the employee’s own vehicle.  The RME exemption does not apply if the payment is for any other purpose, such as for surrendering entitlement to a company car or to enable an employee to buy a car.

Total People Limited v HMRC

In 2010, Total People (formerly the South East Cheshire Training and Enterprise Council) made a claim against HMRC for overpaid National insurance Contributions (NICs).  It claimed that the motoring allowances it paid to its employees should, in fact, be recognised as RMEs and, therefore, excluded from earnings for the calculation of NICs.

Total People employed training advisors who did a lot of travelling in the performance of their duties.  They used two methods of paying motoring expenses:

• a flat mileage rate of 40p, and
• a mileage rate of 12p or 13p, plus a lump sum payment paid in monthly installments.

The second payment method was generally used if more than 2,500 miles were traveled on business during the year, largely because it discouraged the drivers from driving unnecessary miles in order to maximise the payments.  In essence, the lump sum ‘topped up’ the mileage reimbursement rate of 12 / 13p to the approved 40p figure, based on an averaging method that looked at expected miles travelled in a sample of the mileage histories.

Total People paid the lump sum payments through the payroll and subjected them to tax and Class 1 NICs.  However, they claimed at the First Tier Tax Tribunal that the payments were actually reimbursements of motoring expenditure and should be treated as RMEs.  As such, they should not form part of earnings for NICs.

Both HMRC and Total People were in agreement that Regulation 22A of the Social Security (Contributions) Regulations 2001 gave an exemption to the 12p / 13p / 40p payment, as this was clearly RME.  It was the lump sum payment amount that was always contended, with HMRC saying that this constituted earnings.  Although the lump sum payment was included in the staff handbook as ‘part of the recruitment package’, it was not included in the contract of employment and the payment was not increased in line with the staff salary increases and was subject to a separate review.  It was this last fact that led the First Tier Tribunal to find in favour of Total People in that the lump sum should not be considered earnings but should be regarded as RME, on which there was an exemption from NICs up to the statutory limit (40p at the time of the case).

HMRC Appeal – Upper Tax Tribunal

In 2011, HMRC appealed against the decision to the Upper Tax Tribunal and that tribunal’s decision was published on 16 August 2011.  The judge agreed that the lump sum payments were made in respect of motoring expenses but questioned whether, as required by the legislation, they met the key condition for being ‘relevant motoring expenditure’ (RME), namely amounts that are paid to an employee for expenses related to their use of the vehicle.  The Tribunal ruled that there must be a link between the payment and the use of the vehicle and, as they are called ‘mileage allowance payments’, there must be a link between the payment and the miles driven.  The evidence provided by Total People showed that:

• there was no relation, other than by chance, between the payments and the level of use made by employees of their cars,
• the payments were made, not to defray the cost of use but to defray the cost of acquisition or ownership, and
• the rates paid to senior employees using their cars infrequently were higher than those paid to junior employees using their cars extensively.

The appeal was allowed on the grounds that the payments were not of relevant motoring expenditure because they were not paid by reference to, or with regard to, the use by the employees of their cars on their employer’s business.

The Upper Tribunal ruled that the original First Tier Tribunal ruling had made an error in law in arriving at its decision.  The FTT had ruled that the lump sum payments were not earnings but were RMEs.

Court of Appeal Ruling 3 October 2012

Total People appealed to the Court of Appeal following the Upper Tribunal overturning the original decision by the First Tier.  The case was now represented as Cheshire Employer and Skills Development Limited (formerly Total People Limited) v The Commissioners for Her Majesty’s Revenue and Customs.

At the Appeal, HMRC said that the FTT had made an error of law and the Upper Tribunal was correct in overturning their ruling.  Further, they said that there was insufficient link between the payments made to the employees and the actual business use of the cars – the lump sum payments were always estimates based on averages, never exact figures.  As such, continued HMRC, the lump sums were over-generous and could only be regarded as earnings, as there may be a profit element for the employee.

In discussion, the Appeal said:

• Cheshire Employer and Skills Development Limited (CESDL) were not administering an ‘abusive’ scheme with the intention of avoiding a tax or NICs liability
• HMRC did not claim that there was not a genuine compensation element in the lump sum payment.  Indeed, by not claiming this, there was a recognition that the scheme was designed to compensate the employee for mileage incurred in the performance of his duties
• Employees and employers already have the right to claim tax relief up to the statutory limit (now 45p per mile).  Therefore, despite the legislation, HMRC’s case is to ‘eliminate entirely’ any right of the employee and employer to enjoy a similar NICs relief

The Appeal ruled in an Approved Judgment in November 2012 that CESDL’s scheme was ‘bona fide’ and was designed to prevent employees making any profit from the reimbursement of motoring expenses that they received via the lump sum payment.  Therefore, the Upper Tribunal was incorrect in finding that there was an error of law and CESDL’s appeal against HMRC was allowed – the lump sum payments in this case were not earnings.

Comment

In short, the approved ruling allows CESDL to claim the refund on NICs between the 12p / 13p mileage payment and the statutory Relevant Motoring Expense (RME) mileage rate given by HMRC – i.e. 45p for the first 10,000 miles.  This appears to align the rules for tax and NICs in this regard, with the exception that tax relief is only due at 45p on the first 10,000 miles, reducing to 25p thereafter.

Therefore, where an employer pays a car allowance to employees, which is designed to reimburse the cost of running the employee’s vehicle, the employer could claim that this constitutes RME and, as such, enjoy a NICs exemption.  This would be in the instances where:

• the car allowance scheme pays at a mileage reimbursement rate of less than 45p
• the employer has the necessary documentation in terms of verifying or averaging business mileage
• the car allowance and the salary are not linked

This decision does not contradict in any way HMRC’s published guidance that, for a lump sum payment to enjoy the limited exemption, there must be a clear connection between the payment and the use of the private vehicle for business travel.  Employers may want to review existing car allowances where they are directly related to the level of business use made by employees in their own cars.

Further Information

• Bailii  – Total People v HMRC (2010 ruling FTT)
• Payroll Help 28 August 2011 – Mileage Allowance Payments and Essential User Allowances
• Bailii  – Cheshire Employer and Skills Development Limited (formerly Total People Limited) v HMRC (2011 ruling Upper Tribunal)
• Bailii  – Cheshire Employer and Skills Development Limited (formerly Total People Limited) v HMRC (2012 Appeal)