3 December 2012
When is a payment for expenses a mere recompense for sums expended in the performance of one’s duties and when is it a profit, an overgenerous reimbursement, a taxable benefit or indeed earnings?
The point was recently debated in Court and John Messore of Innovation Professional Services Limited was there to hear it first-hand.
On the 3rd of October the Court of Appeal heard the appeal by Cheshire Employer and Skills Development Limited (CESDL) (hereinafter referred to as Total People) against the Upper Tribunal (UT) decision in favour of HMRC.
You may recall that Total People operated an expense scheme whereby staff with their own cars who drove fewer than 2,500 business miles p.a. could claim 40 pence per business mile and those staff driving over 2,500 business miles p.a. instead received 12 or 13 pence per business mile plus an annual lump sum allowance, paid on a monthly basis.
Total People won their First Tier Tribunal (FTT) case against HMRC contending that the monthly lump sum allowances (i.e. the motoring allowances) they paid to their staff were not earnings but rather represented Relevant Motoring Expenses (RMEs) within Social Security (Contributions) Regulations 2001 reg 22A (3) – i.e. they were a form of payment in respect of the use by the employee of a qualifying car.
The expense payments were arranged to result in roughly the same amount of business expenditure being reimbursed. The break-even for those staff driving over 2,500 business miles per annum was set at c. 7,500 miles per annum by the employer, based on 15,000 miles p.a. of which 50% was business. Staff on average actually drove nearer to 8,000 business miles per annum and so many staff driving their own cars who received the lump sum payments were in fact receiving less business expense reimbursement overall from their employer than if they had instead been able to claim the full 40 ppm on all work related motoring.
At the UT Judge Bishopp overturning the FTT holding that the FTT had addressed itself to the wrong question and then sought to justify his decision by saying that even though such lump sum payments were for motoring expenditure they were not ‘relevant motoring expenditure’ (RME) and therefore had to be earnings subject to NIC. He further justified this, later on when he re-wrote his decision, by focussing on Social Security (Contributions) Regulations 2001 Regulation 22A (3) (a) even though the payments in question clearly fell within 22A (3) (c) and the law is clear that to be an RME you have to satisfy (a), (b) or (c) rather than (a), (b) and (c).
At the Court of Appeal, Richard Vallat acting for HMRC decided to argue that both the FTT and the UT had addressed themselves to the wrong question and that the FTT should instead have asked itself the question as to whether the payments were ‘over-generous’ in nature, and if they were then there must be an element of profit and therefore the lump sum allowances should be treated as earnings. Vallat further argued that the FTT had made an error of law by not asking itself the right question, even though HMRC itself did not ask or raise such a question itself either at the FTT or the UT, and contended that as some staff would have profited by the arrangement the allowances must as a whole have been too generous and therefore must be earnings for all employees.
The rebuttal from Giles Goodfellow QC acting for Total People was to refer to Donnelly (Inspector of Taxes) v Williamson  STC 88;
55. Both sides accept the analysis of Walton J in that case. What emerges from his judgment are the sensible propositions that, in a case where an employer establishes a general scheme for reimbursement of employees’ travelling expenditure, then in determining whether the allowances are to be treated as the taxable earnings of the employees because they involve a profit element or they are to be ignored because they are reimbursement of expenditure: (1) a broad brush approach is necessary in view of the practical constraints of devising a scheme that can apply to a number of different employees and is administratively workable; (2) the test is not whether the allowance produces a mathematical equivalence with the expenditure; (3) rather, the question is whether the scheme was constructed in a genuine endeavour to produce an equivalence between the allowance and the expenditure and to apply with approximately equal justice to all within its scope.
Total People had made a genuine attempt to arrive at a fair annual / monthly allowance. Furthermore the facts confirmed that reasonable efforts had been made to properly quantify what the right level of lump sum should have been and on average they were not overgenerous. In fact it could be argued that the opposite was true.
Criticisms were made of both earlier Tribunal cases;
44. In the light of the arguments advanced on this appeal, it is clear that the FTT and the UT were not well served by the parties’ advocates. No cases were cited to the FTT, and, in particular, no reference was made to Donnelly.
One judge could not see how HMRC was in any way worse off compared to if all the employees of Total People had simply received 40 ppm. The taxpayer was not claiming back NIC on the whole lump sums for the last six years (in fact longer as the case goes back to 2002) but simply the excess of the 40p AMAPS rates over the 12 ppm AFR rates which they had already paid tax/NIC free.
Giles Goodfellow then tried to open the debate to a wider subject around Para 3 Part 8 of Schedule 3 to the Social Security (Contributions) Regulations 2001. This refers to a class of payments to be disregarded for NIC purposes where they relate to “qualifying travelling expenses”.
Had this actually have been debated then this might have confirmed that even if you had received only a part contribution from your employer towards your expenses, rather than the whole reimbursement then that element of your pay reflecting the difference should not have been subject to NIC. This may also have highlighted the obvious discrepancy between tax and NIC.
For example, an employee works part time and earns £15,000 per annum part of which is designed to cover costs of business travel. They incur £850 wholly, exclusively & necessarily on business travel but receive no further reimbursement from their employer.
The question is then whether £850 should be deducted from the NICable salary of £15,000 in arriving at the figure on which primary and secondary contributions are due? After all, the business expenses would be deductible for tax so why not NIC?
Unfortunately for certain interested parties the debate did not get that far, as by then it was clear that the judges had heard enough to form a view on this particular case. This line of argument will therefore have to wait for another case to clarify the legal position.
All three judges came down squarely behind the taxpayer.
57. I consider it is quite impossible, however, fairly reading the FTT’s decision, to say that the FTT failed to address the relevant issues mentioned in Donnelly or to say that there was no material on which the FTT could properly have come to the decision which it did. It weighed up all the arguments addressed to it by Mr Adkinson, on behalf of HMRC, challenging the degree of linkage between the amount of the lump sums and actual business use. Critically, it found as facts that the scheme was a bona fide scheme, that the lump sum element was designed precisely in order prevent staff making a personal profit by maximising their travel on a 40p. per mile basis, and that the scheme was designed with a view to administrative convenience. The FTT expressly recognised that it was carrying out an evaluation exercise, in which there was evidence and there were arguments capable of pointing to different conclusions. It was fully entitled, in the light of the evidence as a whole, to come down finally in favour of the conclusion that, on general principles, the lump sum payments were not earnings. It follows that it did not make an error of law on that issue, and that it was right to allow CESDL’s (Total People’s) appeal.
The NIC at stake here was only £147,000 and the taxpayer in question was happy to reach a settlement at the time but HMRC refused to entertain such a course of action and instead chose to litigate.
Interestingly in the persuasive case of Donnelly (Inspector of Taxes) v Williamson referred to above WALTON J. starts his decision as follows:
‘Believe it or not, this appeal by the Crown is in respect of tax at the basic rate on a sum of £13, assessable in two different years. This is not merely a case of taking a sledge hammer to crack a nut; it effectively ensures that the nut itself and a good deal more, will wholly disappear in the operation.’
Because the judges were most specific only to opine on the detail of this case, HMRC may make it difficult for others to use the case to argue for a refund of NIC unless other companies are able to show sufficient similarities to Total People as regards the payments of motoring allowances. However, if they can, then a sizable refund now awaits!
John Messore ACA ATII and Peter Moroz FCA ATII are Directors of Innovation Professional Services Limited and specialise in all matters relating to the taxation of car allowances, company cars, fuel, fuel buy-out and other employee benefits and also offer an on-line mileage audit and capture solution. They can be contacted on 01633 415326 or at email@example.com or firstname.lastname@example.org