A recent tax appeal which has reached the Upper Tier Tax Tribunal (UTT) has been heard and the decision could be significant for companies who offer a car allowance to their employees rather than a company car.
Background
In the case heard, arrangements were in place for two employers which allowed 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 business use, but there were no directions on how the allowance should be spent by employees. The companies involved in the case treated these payments as earnings subject to income tax and national insurance.
However, both employers contended that the car allowances were Relevant Motoring Expenditure (RME) for NIC purposes and that any ‘qualifying amounts’ of RME were not liable to NIC. The qualifying amounts being 45p per business mile less any business mileage separately paid.
Both employers sought significant refunds of NIC which were initially rejected by HMRC, and the case went to the UTT to be heard.
The judgement
In its judgement on 10 July 2023, the UTT agreed with both taxpayers that their car allowances were RME, and therefore the qualifying amounts of RME were not liable to NIC.
The UTT decision was mainly because RME for NIC purposes has a much wider definition than HMRC had contended and included car allowances paid for expected or potential use of a car, or for making a car available for use. The UTT also found that the grade of the employee, and how the car allowance is spent by the employee, are irrelevant for determining whether a payment is RME.
Impact on similar employers
The UTT’s decision is currently setting a binding precedent. It means that any employer paying car allowances in comparable circumstances to those in this case (where employees have paid tax and NIC on the allowances, have used the cars at least partially for business but have not been paid 45p per business mile), could potentially seek refunds of both employers’ and employees’ NIC from HMRC, potentially going back six years. The claim would be based on the NIC suffered on an amount equal to the HMRC approved mileage rate of 45p per mile for the first 10,000 miles in a tax year and 25p thereafter, less the actual business mileage rate paid to the employees.
HMRC do have around 30 days to appeal this decision and if they do so, it could take at least one or two years for the case to be reheard in the Court of Appeal. It is likely that any employers who follow suit and claim refunds will have to wait for this case be resolved before any refunds are issued. It is also likely that the government may seek to amend the legislation on this matter in the forthcoming Autumn Statement.
However, for now, protective claims for refunds of national insurance on payments made as detailed above could be advisable for affected employers in order to ensure that the opportunity to make such a claim is not missed.
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