HMRC loses cash allowance appeal | Ruling impacts grey fleet payments

HMRC faces having to refund employers millions of pounds after wrongly refusing tax relief from national insurance payments paid on car allowances, a UK court has ruled.

Two employers – Wilmott Dixon and Laing O’Rouke – have successfully argued that car allowance payments made to its employees were ‘relevant motoring expenditure’ and therefore should qualify for relief from Class 1 National Insurance Contributions (NICs).

Both cases were heard together. Laing O’Rourke was appealing an earlier decision which had ruled in favour of HMRC, while the UK’s tax authority was appealing a previous ruling in favour of Wilmott Dixon being able to claim the relief.

This week, after considering the evidence, two judges in the UK’s Upper Tribunal ruled in favour of the employers, leaving HMRC potentially having to repay Laing O’Rourke £2.2 million in NICs from tax years 2004/05 to 2017/18 and paving the way for many more claims.  

Both cases follow the landmark Total People tax ruling from more than 10 years ago, when HMRC lost a case at the Court of Appeal involving grey fleet mileage claims.

Total People’s long-running legal battle related to an NI refund claim based on the difference between the HMRC 40p per mile (ppm) approved mileage allowance payment (AMAP) rate (now 45p) and the 12ppm paid by the employer plus an additional lump sum paid to the employees for using their private cars on business.

The value of the amount claimed was approximately £146,000 or around £1,000 per employee, which was subsequently paid by HMRC.

In what was the first test case following the Total People ruling, Laing O’Rourke argued in a First Tier Tribunal, two years ago, that its car allowance scheme should also qualify for relief from NICs on payments made to employees. 

HMRC argued that relief did not apply, because the payments could not be defined as relevant motoring expenditure. Judge Tracey Bowler agreed, ruling in favour of HMRC. 

Hearing Laing O'Rourke's appeal in the Upper Tribunal, however, the Honourable Mr Justice Michael Green and Judge Jonathan Cannan decided that Judge Bowler had “erred in adopting a narrow definition” of relevant motoring expenditure. As a result, they allowed Laing O’Rourke's appeal, ruling the company was entitled to repayment of NICs paid in relation to car allowances.

In the case of Willmott Dixon, the judges also dismissed HMRC’s appeal. The company had previously argued that car allowance payments made to its employees were relevant motoring expenditure and should qualify for relief.

HMRC had refused to refund Willmott Dixon for NICs paid from 2004/05 to May 2014 relating to car allowance payments made by the firm.

It argued that the car allowances were earnings and not relevant motoring expenditure, but in what was a landmark ruling for fleets last year, the First Tier Tribunal ruled in favour of Willmott Dixon. 

This latest ruling agrees with that original decision and has also now found in favour of Lang O’Rourke, exposing HMRC to further cash allowance claims.

Definition of relevant motoring expenditure

What will be of interest to employers and fleets is that the judges in their ruling said that the definition of relevant motoring expenditure is concerned with the nature of the payment by the employer to the employee, in particular, whether it is in respect of the use of a car.

They say if it is a payment for relevant motoring expenditure, then “one way or another there is relief” for the qualifying amount.

However, they added that the provisions do not focus on how the employee spends the money. Relevant motoring expenditure, they agreed, should be given a wide meaning which includes expected use, potential use and availability for use.

Car allowances at the construction and property firm, Wilmott Dixon were paid to employees based on a grade which was allocated to that employee. The more senior an employee, the higher the grade.

The amount paid did not depend on the number of business miles driven by an employee.

Separate business mileage payments were intended to reimburse an employee for the fuel costs of actual business miles driven.

An employee who was entitled to a car allowance at a certain grade could choose to select a car from a lower grade choice list and be reimbursed the difference in the car allowance for those grades.

HMRC had argued that it should not attract tax relief, because it was calculated by reference to grade, not by reference to actual business use, and some employees who received the allowance did no business miles.

However, the court again disagreed with HMRC. In their ruling, the judges said: “The grade of employee affected the amount of the car allowance which was based on the type of company car that an employee of that seniority would have been entitled to if they had chosen that option.

“Again, the fact that some employees did no business miles cannot affect whether those who did are entitled to the relief.

“In our judgment, the FTT (First Tier tribunal) was correct to conclude that the payments made by Willmott were ‘in respect of the use by the employee of a qualifying vehicle’.

“The payments were made to ensure that the employee had a suitable vehicle available for business use.”

John Messore, managing partner at specialist consultants Innovation Professional Services, who represented Willmott Dixon, told Fleet News: “If it’s a separate payment, i.e. not salary but a car allowance, anyone who has done any miles can claim the difference against that car allowance. It opens the floodgates for every single taxpayer in the UK.”

Messore noted that, while the ruling was good news for employers, many were reluctant to try and claim the cash they were now entitled to back.

Nevertheless, he said he was working with a number of companies who have lodged claims with HMRC and he was confident that, following this ruling, they will similarly succeed.

HMRC has 30 days to appeal the decision to the Court of Appeal.