It is well known that there is income tax relief for business mileage driven in a personal car where the employer reimburses an amount less than the approved mileage allowance payment (AMAP) rate. The question was debated in the courts as to whether there is a similar relief for national insurance contributions (NIC) purposes where the employer pays a car allowance.

The answer of both judges in the recent Upper Tribunal decision Laing O’Rourke Services Ltd v HMRC [2023] UKUT 155 was a resounding yes. This was actually two separate appeals from the First-tier Tribunal (FTT). One case (Willmott) was appealed by HMRC and the other was appealed by the taxpayer (Laing).

Indeed, unlike tax relief (which is optional and only 40% of taxpayers actually claim relief via their self assessment returns or P87 claims), the NIC disregard – as it is called – is mandatory.

Employers MUST give credit/relief (ie, a disregard) for the qualifying amount (QA) = miles x rate (45p) against a car allowance before calculating what primary and secondary NIC are due.

Are there technical differences between income tax and NIC? 

Yes, there are many. The key differences are set out in the table below.

If the driver has already been paid, say, 10p per mile then we are of course looking at the remaining 35p difference only being relieved.

Can I make a claim for historic business mileage?

As employees you can:

a) make your own claims to HMRC (as happened with Mr Andrew Lillicrap, whom I assisted; his case was due to go to court but HMRC saw sense and paid him up in full 10 days before the listed trial date); or

b) ask your employer to claim on your behalf and for all your colleagues.

As an employer you can:

a) advise staff that you will be putting in a protective claim on behalf of the company and all its staff. Protective claims can be made for the refund of NIC paid in error under the error or mistake provisions in reg 52, The Social Security (Contributions) Regulations 2001, SI 2001/1004. These claims would cover this year to date plus the last six full tax years; or

b) if immaterial from a company perspective, advise staff that they can make their own individual claims.

As an adviser:

a) You can alert clients to the fact that claims are possible. Some clients may ask why you did not alert them earlier or when Total People v HMRC [2010] UKFTT 379 (TC) brought this whole area into the open. If the client has only a handful of car allowance takers, you may decide on a cost benefit basis it simply is not worth it to claim. A claim typically works out around £1,000-£2,000 per employee over six years. Fifty staff might therefore equate to a £100k refund if they do enough business mileage, less the cost of compiling the claim, dealing with correspondence, and working the case to ensure a refund is secured. This could still take a few years given how slowly HMRC responds to correspondence.

b) You need to ensure that the client’s car allowance is on all fours with the allowances paid by Willmott and Laing to succeed in a retrospective claim. For example, I met one prospective client who paid travel allowances instead of car allowances. Already I was concerned. You need to be able to demonstrate that the car allowance falls with the definition of RME in reg 22A(3)(c): “It is any other form of payment, except a payment in kind, made by or on behalf of the employer, and made to, or for the benefit of, the employee in respect of the use by the employee of a qualifying vehicle.” A qualifying vehicle is typically a car, although it could also be a van.

c) You should review the client’s car policy, car allowance policy, expenses policy, contracts of employment and any other relevant handbook, and conduct an audit to make sure the client has not been doing anything untoward, for example reimbursing mileage for journeys which were, say, commutes or breaching the two-year rule etc. If a claim is made HMRC may ask for all the above, and more.

d) You should check that the client actually has all the historic mileage records going back six to seven years. Note that HMRC will not accept extrapolation and it may do its own spot check, so you need to be certain that the historic mileage recording and reimbursement was compliant and robust.

e) You should compile a claim, driver by driver, year by year and pay period by pay period. The early adopters and claimants such as Willmott and Laing submitted annualised claims and they were effectively agreed by HMRC because the s8 Notices leading up to the FTT were also annualised. But it is possible – and may be probable – that for new claimants HMRC will want the analysis by month (or by week or four-weekly if that happens to be the earnings period).

f) Before doing the above, I recommend you also do an optional remuneration arrangements (OpRA) review.

What should be changed for the future?

Employees

You should highlight the case to your employer – if they were not already aware – so they can take corrective action. 

Employers

Employers should work with a reputable expert in this area to ensure the payroll entries going forward afford the employee the correct NIC relief against their car allowance. Technically if NIC deductions continue, this is an unlawful deduction under s13, Employment Rights Act 1996.

Advisers

The effect of the legislation is that to the extent that the car allowance or RME would otherwise be earnings, the QA (business miles x 45p) shall be disregarded.

Regulation 25 states that Sch 3 specifies payments which are to be disregarded in the calculation of earnings from employed earner’s employment for the purpose of earnings-related contributions. Paragraph 7A, Pt VIII, Sch 3 states that to the extent it (the car allowance or RME) would otherwise be earnings the QA shall be disregarded. QA is defined in reg 22A(4) as number of business miles x rate stipulated in legislation, (ie, business miles x 45p).

To help clients going forward it is best to have a digital or online mileage capture system that integrates directly to the client’s payroll. Changes to the payroll must also be made to ensure relief is given for NIC, while avoiding many mantraps (outside the scope of this article) associated with payroll and RTI (impact on pensions, national minimum wage, child maintenance payments, student loans, OpRA etc.)

Ideally, such a system would be designed by UK tax experts with HMRC and these RME claims specifically in mind.

You could subcontract or outsource all of the above to a specialist firm with a proven track record to safely deliver all of the above in a compliant way every pay period.

Why is this new news?

Arguably it is not. There have been very few amendments or changes to the regulations on mileage relief since they were first introduced in 2002.

It is partly a question of most people not having properly read the regulations, coupled with HMRC’s view following the Total People case in 2011 that a car allowance was not RME – unless it was directly linked to the mileage driven each month by the employee – as per Judge Bishopp in the Upper Tribunal in The Commissioners for HM Revenue and Customs v Cheshire Employer and Skills Development Limited (formerly Total People Limited) [2011] UKUT 329 (TCC).

The question of what is RME and the meaning of the words “in respect of the use” so vexed taxpayers and HMRC alike that it took at least four further cases to decide. I say “at least” because Mr Lillicrap was also listed for a hearing only to have the hearing halted when HMRC decided to pay out in full.

Summary of the main recent cases

Laing O’Rourke v HMRC

Laing O’Rourke was the first case to be heard. The FTT judge decided that the car allowance in question was not a payment in respect of the use of a vehicle for business, because it was also given to staff who did little or no business mileage. She took a very narrow and restrictive view of reg 22A(3), maybe thinking it was a relieving provision.

Willmott Dixon v HMRC

In Willmott Dixon, the FTT judge crucially disagreed with the Laing O’Rourke judgement on the RME point, deciding that the car allowance was relevant motoring expenditure and hence the para 7A disregard applied. This was because he realised that reg 22A is a charging provision and the net is drawn very wide. Indeed, use can be private use as well as business – a point that HMRC has never disputed.

He also agreed with our KC (then a QC) that the fact that quantum was linked to grade and seniority was irrelevant. One had to look at the purpose of giving the allowance and not the amount received by each employee. It was clear from all the evidence that the purpose of giving the car allowance was to enable an employee to put himself in a position where a car was available to be used on business whenever the employer required.

The judge went further, stating that availability for use is still a payment “in respect of use” whether used or not.

HMRC kept repeating that the allowance had to be “for” use. The word “for” however does not appear in the regs. The draftsmen specifically chose the words “in respect of”, which have a much wider ambit than the word “for”.

Appeals heard at the Upper Tribunal

HMRC appealed the Willmott Dixon decision, and Laing O’Rourke appealed the decision in favour of HMRC. The two cases were heard jointly at the Upper Tribunal in March 2023. 

The Upper Tribunal agreed with the Willmott FTT decision rather than the Laing FTT outcome.

Both judges agreed that the net was cast extremely wide in reg 22A(3) so as to catch absolutely anything connected with a personal car usage or running costs, which might not otherwise be caught as earnings. To do otherwise could have left a hole whereby a payment to an employee (eg, paying for his business insurance or covering a repair that took place as a result of a business journey) fell both outside the definition of general earnings and also outside RMEs and therefore escaped NIC altogether.

Appeal to the Court of Appeal

Most commentators assumed HMRC would appeal simply to kick the can down the road, with the slim chance that it may one day win. HMRC asked for an extension of around four weeks to decide if it was going to appeal the Upper Tribunal decision.

On the grounds that you actually need legitimate grounds to appeal, which HMRC did not really have given how concise and technically correct the Upper Tribunal decision was and given HMRC’s responsibilities not to take cases unless there is a realistic chance of victory, it clearly concluded, and rightly so in my opinion, not to appeal.

It is worth stressing that if you read the ministerial debates at the time in Hansard, the impact assessment when the changes were brought in and all the explanatory notes to the regulations, it is clear that Parliament was trying to give tax and NIC relief at 45p (40p originally) in order to encourage taxpayers to use less-polluting cars with smaller engines that were cheaper to run, while discouraging petrol guzzlers. Hence the flat rate of 45p no matter what vehicle is used.

An opportunity to claim?

It is unlikely that HMRC will seek a law change as a result of losing these cases. Certainly it is highly unlikely to do anything retrospectively.

HMRC may put up more barriers for new claimants compared with companies that took my advice 12 years ago and submitted protective claims then.

I do, however, doubt that this will cost HMRC much given that the last time I checked, only 55 live protective claims were in the system. Even if many more claims are now submitted, without the historic records the total payouts will not be material to the Exchequer, but they will be very material and extremely welcome to those organisations that do successfully claim. Good luck!

John Messore, a freelance writer, Managing Partner and Director, Innovation LLP, and a member of ICAEW Tax Faculty’s Employment Taxes and NIC committee