Upper Tribunal gives green light to NICs reclaims on car allowances

In Laing O'Rourke Services Ltd v HMRC and HMRC v Willmott Dixon Holdings Ltd [2023] UKUT 155 (TCC), the Upper Tribunal (UT) decided, in two appeals heard together, that qualifying amounts of cash car allowances paid to employees were within the NICs earnings disregard in paragraph 7A, Schedule 3, Social Security (Contributions) Regulations 2001 (the 2001 Regulations).

Background

Two taxpayers claimed repayment of NICs paid in relation to car allowances.  One taxpayer, Laing O'Rourke Services Ltd (Laing), had been unsuccessful in its appeal to the First-tier Tribunal (FTT), and appealed to the UT. The other taxpayer, Willmott Dixon Holdings Ltd (Willmott), had been successful in the FTT and HMRC appealed to the UT.  

Laing

Certain Laing employees were entitled to participate in a car allowance scheme, under which a cash allowance was payable in lieu of a company car.  The employees had to have a valid driving licence, and access to a reliable roadworthy car, insured for business travel, commensurate with the car they would have been eligible for under the company car scheme that Laing also operated.  Spot checks were carried out to ensure that the requirements were met.  Employees participating in the scheme could make separate business mileage claims for business miles driven, which were payable at a lower rate than HMRC's 'approved mileage allowance'.  Employees were not required to make any car journeys for business. In 10 of the 14 years in question, half the employees receiving payments under the scheme drove no business miles.  

Willmott

Willmott operated a similar scheme.  Employees could receive either a company car or a car allowance.  The amount of allowance did not depend on the number of miles driven, but on the employee's grade (which depended, generally, on their seniority).  Employees receiving a car allowance were required to have a serviceable vehicle available for business use, though (as with the Laing employees) they did not have to own or lease that vehicle themselves.

Legislation

Section 3, Social Security Contributions and Benefits Act 1992 (SSCBA 1992), provides that 'earnings' on which NICs are payable includes any remuneration or profit derived from employment.  

Regulation 22A, 2001 Regulations, provides that some amounts which would not otherwise be earnings are to be treated as 'earnings' in connection with the use of certain vehicles, including cars.  The amount to be disregarded is calculated using the formula RME-QA, where RME is 'relevant motoring expenditure' and QA is the 'qualifying amount' (itself calculated by reference to the number of business miles travelled). 

Regulation 25, 2001 Regulations, provides that certain payments are to be disregarded in calculating earnings.  Paragraph 7A, Schedule 3,  2001 Regulations, provides that 'the qualifying amount calculated in accordance with regulation 22A(4)' is to be disregarded.

UT decision

The UT, hearing the appeals in both cases together, ruled in favour of the taxpayer in both cases.

The UT agreed with the FTT in both appeals that the wording of paragraph 7A, Schedule 3, 2001 Regulations, required QA to be  RME: the reference to QA was 'intrinsically bound' with the provisions identifying RME.  It went on to consider whether the payments in question were RME and agreed with the taxpayers that RME included payments relating not only to the actual use of the relevant vehicle by the employee but also to expected use, future use, or availability for use.   There had to be some connection between the payment and use of a motor vehicle, but the payment was not necessarily restricted to expenditure on actual use.

In allowing Laing's appeal, the UT held that where employees were required to have a reliable vehicle available for use and actually undertook business mileage, the payments were 'in respect of the use' of a vehicle.  

The UT dismissed HMRC's appeal in Wilmott, agreeing with the FTT that the fact that employees were able to use the car allowance as they saw fit was irrelevant.  On the facts of the scheme, the fact that some employees did not do any business miles did not affect whether those who did, were entitled to the relief.  The payments were made to ensure that the employee had a suitable vehicle for business use, and the payments were therefore RME.  Accordingly, they were to be disregarded for the purposes of determining an employee's earnings for NICs purposes.  

Comment

This decision will be of interest to any employer that pays a car allowance to its employees.  Subject to the result of any further appeal by HMRC, such employers may be able to reclaim NICs paid on such allowances and may wish to consider submitting repayment claims to HMRC on a protective basis.  

The decision can be viewed here.