National Insurance on Car Allowances - A refund opportunity?

Employers may be able to claim a refund of National Insurance Contributions (NIC) from HMRC in relation to employee car allowances paid to employees who use their own vehicles for business journeys.

Claims must be supported by detailed data - which may be challenging to analyse, collate, and present - but in the right circumstances that analysis will certainly be justified.

The technical basis

The recent legal case of Laing O’Rourke and Willmott Dixon v HMRC was a joint appeal by the taxpayer employers to the Upper Tribunal. The appeal argued that employee car allowances constitute Relevant Motoring Expenditure for NIC purposes.

The Qualifying Amount is the maximum amount of Relevant Motoring Expenditure an employer can pay NIC-free to an employee, who uses a privately owned vehicle, in respect of motoring expenses.

The Qualifying Amount is calculated by multiplying the number of business miles travelled by the employee by the appropriate HMRC-approved mileage rate.

The employers were successful in their appeal that car allowances do constitute Relevant Motoring Expenditure and HMRC are not appealing the decision further.

Practical application

Under the HMRC rules, employers can reimburse employees who use their own vehicle for work up to 45p per mile for business journeys. The tax-free mileage rate drops to 25p per mile after the first 10,000 business miles, but the 45p rate continues past that level for NIC relief purposes.

Therefore, if an employer reimburses employee business miles at a rate below 45p per mile, there is an element of unused relief on the difference between the HMRC 45p rate and the lower employer rate.

If the same employee has also received a car allowance on which PAYE / NIC has been operated, the unused relief from the mileage reimbursement can be used against the equivalent amount of the car allowance.

The employer NIC and employee NIC paid on that amount can now be claimed as a refund from HMRC.

Historical refunds can be claimed going back up to 6 years.

Illustrative refund

An employer has 200 eligible employees who are paid a tax/NICable car allowance through payroll.

Employees use their own cars for business journeys for which the employer reimburses them at the rate of 20p per mile. The employees each complete 10,000 business miles per tax year.

Employer NIC at 13.8% on the unused relief of 25 per mile would be £69,000 for one year and £414,000 over 6 years. Employee NIC could also be claimed.

Claiming a refund – key factors to be aware of

In light of HMRC not appealing the Laing O’Rourke and Willmott Dixon case, they are likely to scrutinise any NIC refund claims very closely.

Employers will need to demonstrate that the circumstances on which they are basing their claims are as close as possible to those in that case.

The essential supporting factors will be:

1. Car allowances are paid to employees in relation to employees using their own vehicles for business purposes
2. Car allowances are paid via the payroll subject to Class 1 NIC
3. The employees are reimbursed for business mileage in their own vehicles at a rate lower than 45p per mile, or are not reimbursed at all

The data analysis required to support the above factors is likely to be extensive.

We anticipate HMRC will not accept estimates based on, say, sample periods – actual figures will be required for each employee and each period.