Car allowances – NIC reclaim opportunity – can my business make a claim?

Following a recent tribunal case involving HMRC, it was found that car allowances can be treated as relevant motoring expenditure. This means many businesses could now be due a refund of NIC from HMRC for previous tax years.

To help you understand your position, we’ve summarised the recent case, what you need to know about making a claim and FAQs from our clients. We held a webinar on 14 September to talk through the changes and answer any questions you may of had. Please use the quick links below to navigate to sections: 

Overview

Many employers offer their employees a car allowance, which is essentially an additional payment alongside their salary to enable their employees to have access to a personal vehicle, rather than providing them with a company vehicle.

One major difference between the use of a car allowance and a company vehicle is the amount in which employers can reimburse employees for business mileage in accordance with HMRC’s approved mileage allowance. The employees will, however, need to bear the cost of ongoing repair and maintenance and annual vehicle license costs.

Employers can reimburse employees up to 45p (up to 10,000 miles), or 25p (where business mileage exceeds 10,000 miles) per mile for personally owned vehicles rather than the lower advisory fuel rates for a company vehicle (dependant on engine size and updated quarterly) tax and NIC free.

However, it is important to also note that the rate only drops to 25p per mile after 10,000 miles for tax relief purposes. Payments can be made NIC-free at 45p per mile regardless of the number of miles travelled in a tax year.

Where employers reimburse their employees at less than HMRC’s approved mileage rates, employees have always been able to reclaim income tax relief on the difference by submitting a claim to HMRC (either via self-assessment or through form P87).

However, following the Total People case originally heard back in 2010 - 2012 as well as now Laing and Willmott, NIC refunds may be able to be sought too.

What has happened to change the landscape?

The long-running dispute over how National Insurance Contributions (NIC) apply when car allowances are paid to individuals for business mileage, appears to have been resolved following the recent Upper Tier Tribunal (UTT) ruling considering cases of Laing O’Rourke Services Ltd and Willmott Dixon Holdings Ltd [2023] UKUT 00155 and HMRC now confirming that they are NOTappealing the tribunal’s decision. In short, the taxpayers won and NIC refund claims may now be possible. 

The case was in effect two appeals combined; one from Laing O’Rourke who had previously lost their FTT case against HMRC involving a reclaim of c.£2.2m of NIC; the other from HMRC who had previously lost their FTT case against Willmott Dixon.

One of the key points of this hearing is that the UTT confirmed that the car allowances meet the definition of the Relevant Motoring Expenditure (RME) within the NIC regulations. NIC is not due on RME and should not have been subject to NIC where not in excess of HMRC permitted rates. Therefore a NIC refund claim can be made where NIC has been incorrectly charged on RME.

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What should you do next?

Following HMRC confirming that they are not appealing the decision made, employers should look to take the following action:

  • Undertake a review at a high level of whether you could qualify and what the potential reclaim quantum might be;
  • Look to make an initial protective claim to HMRC to inform them you will be sending further details and analysis on this NIC reclaim opportunity. This helps establish dialogue and also ensures HMRC is aware a claim will be made, giving time to prepare this as accurately as possible, without incurring significant costs and time at the outset; and
  • Finally, provide HMRC with the necessary details to make a repayment of the relevant NIC.

We can help with all aspects of the above. Please feel free to complete the form to get an understanding of potential reclaim amounts that may be due to you.

Could you have a claim?

Where you have the following fact pattern, an initial exercise can be undertaken to identify the potential quantum of any possible claim and whether you have appropriate records (business mileage claimed and amounts paid) to support such a claim:

  1. Car or van allowances have been paid to employees;
  2. Business mileage has been paid to those employees at less than 45p per mile; and
  3. Business mileage payments have been made historically (e.g., over the past six years).

This could also be a good time to re-examine any policies in this area to assess what to do with travel expenses and reward in the future and how you can continue to pay car allowances where there is business mileage being reimbursed, as well as how NIC may interact on a pay period by pay period basis

What does a claim look like in terms of potential refunds?

For example, at a high level, if you have 100 eligible employees and they each completed 10,000 business miles each tax year which were reimbursed at 15p per mile, the employer’s NIC saving at 13.8% would be £41,400 for each year for which a claim could be made.

There would also be a corresponding refund claim for the employee NIC at 12% (assuming earning less than the Upper Earnings Limit) of £36,000 for each year, or £360 per employee per year.

Therefore, going back six years would leave an employer NIC reclaim of approximately £250,000 and a total employee NIC reclaim of £216,000, giving over £460,000 in total This is before any consideration of interest due or potential interaction with Apprenticeship Levy charges has been considered.

Key Takeaways

For the employer – look at your records and consider if you could make a protective claim in relation to employer and employee Class 1 NIC and potentially Class 1A NIC where total mileage has been reported on Form P11D (e.g. if a fuel card was provided to an employee with a personal vehicle).

For the employee – if you have not made a claim for tax relief historically for the difference between the amount your employer refunded and the approved mileage rate (since 2011 this has been 45p per mile for the first 10,000 business miles), make a claim now!

Use our questionnaire to find out your NIC reclaim position

* A version of this article first appeared in Fleet News. 

Frequently Asked Questions  

We've summarised some of the recently received Frequently Asked Questions from clients, which might prove useful as you consider this in more detail.

Q: Why is there an opportunity to reclaim NIC?

A: Following a recent tribunal case involving HMRC, Laing O’Rourke and Willmott Dixon (read more about this in our Fleet News article here), it was found that Car Allowances can be treated as Relevant Motoring Expenditure, and where an employee receiving a car allowance has undertaken business mileage and been reimbursed at less than 45p per mile, there could be a potential NIC reclaim opportunity for the difference between the amount reimbursed and the 45p per mile, assuming the car allowance has been subject to tax/NIC via payroll. 

Q: What are the basics I need to consider if I have a chance of reclaiming NIC?

A: You need the following three things to make a potential NIC reclaim:

• Employees who have received a car allowance via payroll;
• These employees using their own car for business travel; and
• Business travel being reimbursed at less than 45p per mile.

Q: How can I work out how much NIC I could potentially reclaim? 

A: Use our Form to provide a few details and we will send you a high-level savings analysis that we will then discuss with you to establish the next steps. 

Q: How do I make a refund claim?

A: HMRC have advised that their preferred method for employers to claim a refund is for this to be done through payroll via Real Time Information (RTI). An adjustment can be made by filing a new FPS for each tax year for which a refund is claimed. However, it should be noted that for employees where NIC is calculated on a monthly basis, claims cannot exceed the qualifying monthly rate of RME, with no averaging permitted over longer periods, so this needs to be considered when making the claim.

Where an RTI submission is not possible, then a claim can also be made by writing to HMRC. For larger businesses, the written claim should be addressed to your Customer Compliance Manager (CCM). If your business does not have a CCM, then please get in touch and we can advise where to address the claim.

Q: What evidence do I need to submit to support my claim?

A: At this stage, HMRC have not indicated that they expect supporting evidence to be submitted alongside the claim (particularly where this is made through RTI), but they will be able to undertake a review of claims made and would expect the following records to be kept as a minimum:

• Names and National Insurance numbers of all employees involved in the claim;
• Mileage rate paid per mile;
• Qualifying miles travelled per employee;
• Car allowances paid to each employee involved; and
• A calculation of the Class 1 Primary and Secondary NIC refund due.

Notably, HMRC have stated that petrol receipts do not need to be kept as evidence and a spreadsheet documenting the above details should be sufficient as a starting point.

Where a written claim is made, we would advise enclosing the above details as this will strengthen the basis of the claim and will likely reduce the timeframe for the claim being settled.

Q: Can I reclaim employee NIC?

A: Employees will also be able to receive a NIC refund in light of the Laing O’Rourke and Willmott Dixon rulings. Therefore, we would recommend that employee NIC is included in the claim as this can be refunded to employees directly through RTI. Where the refund is claimed through writing to HMRC, guidance should be sought on how this is paid to the employees when making the written claim.

Q: What about employees who are no longer employed?

A: Former employees will also be entitled to a NIC refund and so we would advise that the claim includes them. HMRC have advised that this should be administered through RTI where possible. Where this is not the case, HMRC should be contacted for assistance with processing the refund.

Q: You talk about NIC, what about tax?

A: Employees should have been reclaiming tax relief via self-assessment or a Form P87 where they have received reimbursement at less than 45p per mile for up to 10,000 miles and 25p per mile thereafter (where driving their own vehicle). If they have not, they will also have a potential tax relief reclaim to make individually. 

Q: How many years can I go back when claiming a NIC refund?

A: HMRC’s statute of limitations goes back six tax years in respect of NIC, so from the current point in time this would allow the refund to date back six years from the date a protective claim is submitted or an RTI refund is processed. However, HMRC have indicated employers may be able to claim a refund in respect of the previous six full tax years (back to the start of 2017/18 from the current point in time) and we expect there to be further guidance published in HMRC’s next Employer Bulletin.

There may also be a basis to go back further than six years where a reasonable excuse can be provided, though careful attention should be paid to HMRC’s guidance around what constitutes a reasonable excuse before including this within the claim.

To get the best possible outcome in circumstances where it will take time to gather the necessary details to make the claim, we would advise making an initial protective claim which will freeze the point in time that the refund can date back to.

Q: What happens if employees have a company car?

A: Typically, car allowances are paid by employers as an alternative to providing a company car and the approved mileage rate of 45p per mile does not apply for company cars. Therefore, if you provide employees with both, it is unlikely you will have a case to claim a NIC refund, however, you may still be able to pay tax and NIC free mileage expenses at the HMRC advisory fuel rates. The amount that can be claimed depends on the vehicle driven and ranges from 10p to 25p per mile.

Q: What if employees are paid a car allowance to cover a specific cost (e.g. a lease payment)?

Provided the car allowance is being paid for the purpose of helping employees cover the costs associated with using a private vehicle for business purposes, then it will be considered Relevant Motoring Expenditure (RME) and so will be in scope where the NIC reclaim is concerned.

Q: What happens if employees are reimbursed at the HMRC approved rate of 45p per mile?

A: Tax and NIC relief should already have been claimed on this amount by way of not reporting it either through payroll or as a P11D benefit.

Q: What if employees aren’t paid a car allowance but are reimbursed at less than 45p per mile?

A: In this instance, it will be deemed that the employer has not paid any additional RME to top up the mileage paid, Therefore, the employee will be able to recover the tax through self-assessment, but the employer won’t be due a NIC refund as there is no RME on which NIC has been paid.

Q: Some employees have exceeded 10,000 miles in a tax year. Does this restrict the NIC I can reclaim?

A: No. The mileage that can be paid NIC free remains at 45p per mile regardless of the number of miles driven. The restriction of relief to 25p per mile after exceeding 10,000 miles only applies for income tax.

Q: Is there a minimum number of miles an employee will need to be reimbursed for before I can claim a NIC refund?

A: No. A NIC refund can be claimed on the difference between 45p per mile and the mileage actually reimbursed irrespective of the number of miles driven. However, it will be important consider whether the costs and time outweigh the potential refund that could be due. 

Q: What happens if I don’t have any business mileage?

A: Relief can only be claimed in respect of business miles, and HMRC expect that appropriate documentation is kept as evidence of reimbursed mileage being business related. Therefore, if you don’t have any business mileage, then it is unlikely there is a basis to recover the NIC on your car allowances.

Q: What if employees aren’t allowed to claim any business mileage?

A: If an employee has incurred business mileage whilst receiving a car allowance, you may be entitled to NIC relief on the full 45p per mile allowance. However, it should be noted that in this instance it may be more difficult to provide supporting documentation for your protective claim given there is no audit trail of expenses, which may reduce the likelihood of the claim being successful. 

Q: What if employees are provided with fuel cards to claim business mileage?

A: As long as accurate records are kept documenting business mileage claims made using the fuel card, then a Class 1 NIC refund can be claimed where mileage is reimbursed at less than 45p per mile. However, please note that where fuel cards are also used to pay for private mileage, HMRC expect that this would be a benefit-in-kind subject to Class 1A NIC and may therefore challenge any Class 1 refunds claimed on the basis that NIC has not been correctly accounted for.

Q: What if employees are reimbursed for both business and private mileage?

A: It will be critical to ensure there are accurate records clearly documenting the split between business and private mileage to ensure a NIC refund is only claimed in respect of the business miles. If these records are not available, this will make it more difficult to make a successful claim.

Q: What happens if the value of the mileage claims on which NIC relief is due exceeds the car allowance paid?

A: In this instance, NIC can only be reclaimed up to the amount that has been paid on the car allowance

Q: What about electric cars?

A: Personally owned electric cars are subject to the same approved mileage rate of 45p per mile as petrol/diesel cars. Therefore, if you’ve been paid car allowances and have been reimbursed for business mileage at less than this, there will also be an opportunity to reclaim the overpaid NIC.

Q: What happens next? 

A: We recommend completing our Form to assess at a high level the potential savings available. We will then have a call to establish more details and set out an approach to::

• Lodge an initial Protective Claim with HMRC. This will be to inform them that we consider you have qualifying circumstances and to make sure we protect as many years as possible that can be included in the NIC reclaim; and then follow up with

• A full NIC Reclaim application either through RTI or by writing to HMRC. The necessary evidence should be gathered alongside this to ensure the claim is robust in light of any potential HMRC review.

HMRC will reserve the right to review each claim in detail critically and therefore this approach will help ensure the NIC reclaim is considered efficiently and dialogue is entered into at an early stage, followed up by relevant details.

We will be happy to support you with this and also consider any wider reward, travel and expense aspects for the current and future tax years.

Q: How do I make a protective claim?

A: The claim will be lodged by writing a letter to HMRC. We are helping clients consider how to prepare this letter currently.

If you are a large business and have a Client Compliance Manager (CCM), it will be appropriate to first talk to this contact initially. Otherwise, please reach out to us if you require assistance with identifying a dedicated contact who can handle your claim.

Q: What about car allowances paid in the current and future tax years?

A: Where a car allowance paid partially or fully meets the definition of RME, the amount subject to NIC can be reduced by making an adjustment through RTI. HMRC prefer that adjustments are made on a monthly basis, although a single adjustment can be made at year end where this is impractical.

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