Contractors, did you know that car allowances are now NIC-free?

For individuals who use their own vehicle for work, double cab picks-ups isn’t the only area of potentially favourable taxation which HMRC has been forced to rethink its applying of the brakes to, writes Naseerah Mussa of law firm Chartergates.

A loss for HMRC…

In fact, in quietly published official guidance on the NICs treatment of car allowances paid to employees, the government has said that due to “HMRC’s loss” in the Upper Tribunal case of Wilmot Dixon and Laing O’Rourke, the types of payment that can fall within the definition of relevant motoring expenditure is “wider than HMRC’s previous application.”

The guidance (entitled "Relevant motoring expenditure -- impact of recent Upper Tribunal decision on National Insurance contributions") goes on to correctly observe that the Upper Tribunal ruled that it’s not just payments relating to actual use but also “potential and anticipated use of the vehicle.”

As a result -- and hinting at the prospect that refunds for overpaid contributions may now be claimable, taxpayers are further advised that “where car allowance payments have been or will be made for use of a qualifying vehicle, they may now benefit from a higher amount of disregard because the amounts classed as relevant motoring expenditure could be higher.”

HMRC versus Laing O’Rourke & Wilmott Dixon

But how did we get here? Well, the guidance is a direct result of two appeals concerning the liability for Class 1 NICs on car allowances that were paid to employees. 

In the first appeal, Laing O’Rourke Services Ltd disputed a First-tier tribunal decision dismissing its appeal against HMRC. The FTT concluded that Laing was not entitled to repayment of NICs paid in relation to car allowances paid by Laing to its employees, during the tax years 2004-2005 to 2017-2018. 

In the second appeal, HMRC appealed a decision by the FTT allowing Wilmott Dixon Holdings Limited to reclaim NICs paid on car allowances, for the tax years 2004-2005 through to 2014-2015. 

The cases were heard concurrently due to the cases having similar circumstances, i.e. the NICs treatment of car allowances paid to employees.

What was the Laing case about?

Laing operated a car allowance scheme, which was determined by reference to job grade rather than staff category or mileage driven. 

There was no minimum business mileage requirement for those that received a car allowance. It was envisaged that some recipients would receive payments under the scheme where they had not undertaken a business journey. 

Throughout the relevant period, Laing treated the payments made to employees under the scheme as being subject to income tax and NICs. A further entitlement arose for those employees who did undertake business journeys. The entitlement was in the form of a claim for the cost of undertaking a business journey, and employees were advised that they could claim income tax relief for the difference between what was reimbursed and the actual cost.

On review, Laing submitted a claim to HMRC for a repayment of NICs on the basis that the car allowance payments were motoring expenses that were Qualifying Amounts and as such, should have been disregarded for NICs.

But the FTT dismissed Laing’s appeal. 

On appeal to the Upper Tribunal, Laing agreed that the payments made under the scheme were “earnings”, but it contended that the FTT erred in its construction of paragraph 7A – i.e. that a payment can be a Qualifying Amount (QA) for the purposes of paragraph 7A, and falls to be disregarded from earnings, whether or not it is a Relevant Motoring Expense (RME). 

Secondly, that the FTT erred in its construction of regulation 22A i.e. that the FTT ought to have concluded that the payments were RME, and were related to use for business purposes and in respect of the use of the vehicles.

Laing argued that such use would not be limited to actual use, but extended to expected use, anticipated use and availability of use.

What was the Wilmott case about?

Wilmott operated a group car policy where employees could either choose to receive a company car or car allowance.  

The car allowance was based on the employee’s grade and was not linked to number of miles driven by each employee. In addition, employees were entitled to payments in relation to the cost of qualifying business journeys undertaken. 

Wilmott’s intention was to reimburse the employee for the fuel costs associated with qualifying business journeys (at a rate of 12p per mile without the deduction of income tax or NICs). Similar payments were made for travel between home and work, but these were subject to income tax and NICs.

Wilmott did not impose any obligation on how an employee may utilise the payments received, but expected each employee to have a properly insured, maintained and reliable car which the employee could use to perform their duties of employment.

The FTT allowed Wilmott’s appeal on the basis that the payments were RME, and QA, and as such fell to be disregarded from earnings by virtue of paragraph 7A.

HMRC appealed the FTT’s decision on the grounds that the FTT gave Relevant Motoring Expense too wide a meaning, and that the FTT’s conclusion that the car allowance was RME was not a permissible conclusion -- given that a payment for having a vehicle available for use was not a payment “in respect of use”. 

Wilmott cross appealed on similar grounds to Laing’s.

What did the UT determine on the key question of what RME entails?

Among the key points of the UT’s decision, one stems from the key question of whether the car allowances paid by both Laing and Wilmott fall within the meaning of RME.

Well, the UT outlined that the inclusion of payments to employees who did not undertake business mileage should not impact the nature of the payments made to those who did. 

The payments constituted a car allowance given instead of a company car, intended for employees engaging in business travel and using their cars for business purposes.  Therefore, the focus should remain on those employees who legitimately used their cars for business, rather than those who did not.

UT judgment summary

Before regulation 22A and paragraph 7A, there was no specific legislation which dealt with the NIC treatment of payments by an employer for the business expenses its employees incurred using their own cars.

Therefore, this decision is seen to be a landmark decision with regard to the NICs regime.

The UT ultimately concluded that where there is a QA, it would always be free from NICs, provided that the payments are RME. 

In short, car allowances are free of NICs, assuming the allowances are for relevant motoring expenses.

The case, which led to NIC rebates of over £2.2m for Laing, and £1.5m for Wilmott, also highlights an important aspect with regard to employee entitlements regarding car allowance and mileage reimbursement. 

The UT confirmed that employees who use their personal cars for work-related purposes, including those who receive a car allowance, have the right to both NICs and income tax relief.

The UT further noted that how employees spend their allowance is irrelevant to the legislation, and all that should be considered is the purpose, which the employer would apply. 

Are we nearly there yet? Indeed we are there, as the taxman isn’t appealing

Given the outcome in favour of both Laing and Wilmott, HMRC has decided not to appeal the matter any further.

That conclusion in the taxpayers’ favour therefore offers an opportunity to other employers who offered a car allowance to employees (under similar schemes to that described to Laing and Wilmott) to perhaps apply for a refund of NICs paid. 

As mentioned at the top, such a potential action is alluded to in the updated HMRC guidance, and the process for doing has also been set out in the same document, under one section for employers and one section for employees but both entitled ‘How to claim a refund.’ In a complex case of National Insurance Contributions and car allowances, with twists, turns and eventually a pot-hole for HMRC, that’s a plain-speaking title we can all get behind.