Insights

It is common knowledge that if you use a privately owned car for business purposes, you are entitled to claim tax relief for business mileage. Whenever a taxpayer uses a privately owned car for business purposes, they are entitled to claim tax relief at the rate of 45p per mile (for up to 10,000 business miles per annum), less the rate paid by their employer.

If the driver is reimbursed by their employer directly, the amount to be claimed tax free cannot exceed 45p per business mile. If the amount of mileage exceeds 10,000 miles in a tax year, the amount claimable drops to 25p per mile. If more than 45p per mile is paid, this becomes a taxable benefit in kind.

The question of whether national insurance contributions (NICs) can also be reclaimed from motoring expenditure has come to light after a number of Tax Tribunal cases. This situation is more complex and hinges around a number of conditions, as this article explains.

Company car allowances

Many companies offer a car allowance payment to an employee instead of them receiving a company car and the amount payable can increase with seniority in the business. The level of NICs paid would therefore also be higher.

In return for receiving a car allowance, the employee is expected to provide a suitable car for business purposes and is responsible for maintaining and insuring their vehicle - the car allowance is intended to contribute towards this. Some companies will also reimburse fuel costs or provide a fuel card.

Are car allowance payments income for NIC purposes?

Recent tax tribunal cases involving construction companies have raised the question of whether car allowance payments can be deemed income and are therefore subject to NICs. In both cases similar questions arose around whether car allowances were earnings for NIC purposes? Did the car allowance payment satisfy any other legal exclusions to be deemed relevant motoring expenditure and therefore not subject to NICs?

The law defining earnings for NICs purposes states that “earnings” include “any remuneration or profit derived from an employment”. This would suggest car allowance payments would not be exempt, but it's actually not as black and white as the definition implies.

Tribunal case outcomes concerning car allowances and NICs

In one case the Tribunal deemed a car allowance provided to the taxpayer was not earnings at all. In another involving a different company, the Tribunal ruled that the allowance was earnings based on that company’s policy and therefore NICs were due. This illustrates that the wording used when describing car allowance schemes should be reviewed by a tax advisor to verify the likely situation before making any claims.

All these cases were complicated and involved interpreting many nuances of the tax legislation.

How to interpret the car allowances and NICs rules

The point that taxpayers should take away is that just because the Court ruled in favour of one company regarding the car allowance payments not attracting NICs, this doesn’t mean that the same would apply for every other scenario. The rules concerning car allowance payments and what is allowable contain many grey areas.  Companies would need to analyse both the rationale and construction of the car allowance payments individually to verify whether or not they are earnings for NICs purposes.

In each case heard by the Tribunal, the arguments boiled down to the way the definition of relevant motoring expenditure could be interpreted. The tax law states that a payment is relevant motoring expenditure if any of the following conditions apply:

1. It is a mileage allowance payment within the meaning of section 229(2) of ITEPA 2003; or
2. It would be such a payment but for the fact that it is paid to another for the benefit of the employee; or
3. 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.

Note that “qualifying vehicle” cannot be interpreted as a bicycle.

What can taxpayers take away from this information?

HMRC’s position is that in order to be relevant motoring expenditure, a payment must be closely linked to the use of the car and especially the level of mileage. They argued that a payment for the use of the car could not be a payment for potential use, or availability for use,; the vehicle needed to be used consistently. HMRC also rules that payment for the acquisition of the car could not be a payment for the use of the car, and neither could a payment which was ‘in lieu’ of providing a company car.

• In some cases, it may be possible to make a claim for NICs paid in respect of business mileage where car allowances have been paid to be refunded; eligibility will depend on individual circumstances.
• It may be possible to back-date a claim by six tax years under error or mistake provisions provided by HMRC.
• If drivers have used a company fuel card the situation can become more complicated.

The whole claim will hinge around the question of whether the car allowance paid by any given company falls within the definition of relevant motoring expenses.  This would be considered on a case by case basis. The important factor is the nature of the payment in terms of the intention and requirements of both employer and employee, which is written into employment contracts and car allowance policy documentation.

If you would like to discuss the taxation of company cars, car allowances or believe you may have a case to reclaim NICs paid on company car allowance payments, please contact us via partners@rjp.co.uk.