19 August 2023
The recent ruling by the Upper Tribunal (UT) in the jointly heard appeals of Laing O’Rourke v HMRC and HMRC v Willmott Dixon means that many employers may be able to claim a refund of Class 1 National Insurance contributions (NICs) accounted for on car allowances paid to employees via payroll, where they have also separately paid those employees less than 45p per mile for business mileage.
These long running cases involved two construction companies that operated arrangements allowing employees to choose between taking a car allowance or a company car. To receive the car allowance, employees had to ensure a suitable car was available for their business use, but there was no direction or obligation on how the allowance should be spent by those employees. In both cases, the employer separately allowed employees to claim business mileage at rates lower than the HMRC approved rates.
Both companies contended that the car allowances were relevant motoring expenditure (RME) and that the part of the RME which was a qualifying amount (QA), was not liable to NICs. The QA is calculated by multiplying the approved mileage rate by the total business mileage of an employee, less any business mileage expenses separately paid to them.
Laing O’Rourke sought a refund of NICs on payments to its employees totalling c£2.2m and Willmott Dixon a similar refund on payments to its employees of c£1.4m. HMRC contended that repayments were not due and both employers appealed to the First-tier Tribunal (FTT), with the appeals against the FTT decisions eventually being heard jointly in the UT. The UT issued its judgment on 10 July 2023.
In its judgment, the UT agreed with both companies that their car allowances were RME and that the QAs of RME were not liable to NICs. Notably the UT said that RME has a wide meaning, which includes where it is incurred in respect of expected or potential use of a car or making a car available for use. The grade of the employee, and how the car allowance is spent by the employee were found to be irrelevant for purposes of determining whether a payment is RME.
What should employers do in response?
It remains to be seen whether HMRC will appeal the decision. Nevertheless, this is an important judgment, with the UT decision setting a new binding precedent, subject to any such appeal.
Employers paying car allowances to employees in the same or similar circumstances to Laing O’Rourke and Willmott Dixon, that have subjected those car allowances to NICs, may be able to claim NICs refunds where their employees have undertaken business mileage. They should also consider whether they need to change the way they deal with their car allowances for NICs purposes going forward. Repayments of NICs could be due from HMRC for up to six tax years. Protective claims can be submitted, where necessary, to ensure potential repayments do not become time-barred.
Employers paying car allowances should consider:
- whether the circumstances are the same or similar to the Laing O’Rourke and Willmott Dixon case such that the car allowances represent RME;
- whether the RME includes QAs;
- the quantum of any employer NICs refunds that might be due, and how arrangements should be structured going forward; and
- how, and by when, claims for NICs refunds should be made, and how this should be communicated to employees – employee NICs refunds may also be due, and employees may not have claimed relief for income tax purposes.
Employers may also want to make sure employees are aware of their ability to claim tax relief where less than the HMRC approved rates are reimbursed.
RSM can assist employers to understand whether a claim would be beneficial, and in making such claims.
For more information, please get in touch with Lee Knight, Susan Ball or your usual RSM contact.