Could your car allowance qualify for National Insurance relief?

If your employees use their own cars for business purposes, then National Insurance relief on car allowance may be up for grabs! RECENT TAX CASES For more years than I care to remember, different tax cases have been presented to…

Blog5th Feb 2024

If your employees use their own cars for business purposes, then National Insurance relief on car allowance may be up for grabs!

RECENT TAX CASES

For more years than I care to remember, different tax cases have been presented to the Courts challenging HMRC’s definition of earnings in respect of payments such as car allowance, without success. However, in the Laing O’Rourke Services Limited v HMRC and HMRC v Willmott Dixon Holdings Limited [2023] UKUT 155, two similar cases heard simultaneously, was around the misalignment of the National Insurance Contributions (NICs) treatment of such expenses compared with that of Income Tax. 

What was the outcome on thEsE tax caseS?

Both Laing and Willmot argued that an element of car allowance payments is deemed Relevant Motor Expenditure and should therefore be exempt from NIC. HMRC didn’t agree and argued that the car allowance payments are earnings and subject to Class 1 NIC. After considering the evidence for both cases, two judges in the upper tribunal (‘UT’) using the Social Security legislation that deals with Relevant Motoring Expenses (RME), which states that RME is only treated as earnings in respect of NICs if it exceeds the amount that an employer is permitted to pay NICs free (Qualifying Amount).

The UT therefore determined that HMRC had wrongly refused National Insurance relief on the basis they deemed car allowance payments as earnings. 

Following on from the case, the law has been revised and NICs reclaims are now possible. This decision has left HMRC potentially having to repay £2.2 million in NIC to Laing O’Rourke and has subsequently opened the floodgate for employers to make similar claims. It is very important to understand what qualifies and is therefore eligible before reclaiming and or processing via payroll going forward. 

What is relevant motoring expenditure?

A payment is considered Relevant Motoring Expenditure (RME) where:

  • It is a mileage allowance payment within the meaning of the approved mileage allowance payments. This is amounts paid to employees for expenses related to the use of a car for business travel.
  • It would be such a payment for the fact that it has been paid to another for the benefit of the employee.
  • It is any form of payment paid to or for the benefit of, the employee in respect of the use of a qualifying vehicle by the employee. 

The UT determined that this phrase should not be interpreted too narrowly. In the recent cases, both employers gave their employees a choice between a company car and a car cash allowance. Those who chose the cash allowance were required to maintain a private vehicle suitable for business use. However, there was no stipulation to specifically spend the car allowance specifically on motoring expenses. The UT agreed with the employers that this constituted RME.

Where an employee undertakes RME and is reimbursed for mileage below the approved mileage allowance payment (45p for the first 10,000 business miles and 25p per mile thereafter), the difference between the approved rate and what has been reimbursed can qualify for NIC relief. 

DEMONSTRATING THIS RELIEF

This relief can be demonstrated as:

  Average number of business car miles travelled:   10,000 

  Company reimbursement rate (under 10,000 miles):   £0.25

  HMRC approved mileage allowance:   £0.45

  Employers NI rate:   13.80%

  Qualifying amount (difference between HMRC rate and company rate):   £0.20

  Total qualifying amount available for relief (business mileage * qualifying amount):   £2,000.00

  Employer’s NI saving:   £276.00

In cases where employers require multiple employees to regularly undertake business travel, this NI saving increases significantly. Taking the above example, if an employer is reimbursing 500 employees in the same manner, this could result in an NI saving of £138,000. Furthermore, employees are also entitled to primary NI relief on the amount, and what better way to increase staff morale than putting some money back in their pocket!

Retrospective claims can be made back to the 2017/18 tax year and these claims, according to HMRC can be made via an amended FPS through your payroll software, however there will be three different ways of processing NICs relief if employers choose to take this course of action.  

HMRC reported via the December 2023 Employer Bulletin, historical reclaims should be submitted via Real Time Information where possible. AAB’s UK Payroll Director, Karen Thomson sought further clarification from HMRC as the real-time information end of year reporting has changed over time. It has been confirmed it will depend on which tax year is being amended.

HMRC has, however, made it abundantly clear that in addition to keeping the required records for each employee and each calculation, for historic tax years, HMRC will accept just one amended year-end return but each must be for one individual employee, for each tax year the relief is being claimed.

How can Sagars help?

  • Our employment tax team can review the company car allowance scheme to determine if payments can be deemed relevant motoring expenditure
  • If eligible determine the NICs relief due on the car allowance payments 
  • Review the historical position to determine if prior-year claims can be made
  • For AAB payroll clients, payroll can submit the appropriate data in real-time using the criteria outlined by HMRC for historical claims and support with claiming NI relief via payroll going forward. Once the car allowance payments eligible for NIC relief are determined, AAB Payroll will be able to ensure the correct value of employees’ and employers’ National Insurance is deducted and reported to HMRC.

If you think you may be eligible for relief, please do not hesitate to get in contact with our UK Payroll Director Karen Thomson or your usual AAB contact. 

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