30 July 2021
The potentially landmark First-tier Tribunal decision in Laing O’Rourke Services Ltd (TC8161) (Laing) concerns whether car allowances are earnings and what disregards are available for National Insurance purposes for business mileage driven by employees.
In 2010, the taxpayer victory in Total People Ltd (TC661) established a principle that car allowances are not necessarily earnings, and National Insurance relief is available to staff in the same way as approved mileage allowance payments (AMAPS) relief – previously known as the fixed profit car scheme.
The Court of Appeal upheld that decision and, since then, we have waited ten years for a new test case to re-examine the principles. Laing is the first in a series of such cases – Laing lost this round but may well decide to appeal.
The eventual outcome of Laing and the other cases matters because it could have a direct financial bearing on millions of other UK workers who use their own cars for business. Also if there is no primary National Insurance there cannot be any secondary National Insurance for the employer.
In the first of two articles, we set out the legal background to income tax and National Insurance relief on business mileage. We also examine the difference between tax and National Insurance treatment in general for mileage expenses. In part two we examine the Laing case and its unique facts in more depth.
For income tax purposes, earnings are defined in ITEPA 2003, s 62 and include salaries, wages, fees and profits.
Section 63 covers taxable benefits and even brings in expense payments, but later provisions then work to exclude some of those benefits or expenses from income tax – see Part 4, starting at s 227 headed, ‘employment income: exemptions’.
Relevant here is s 229 ‘mileage allowance payments’, defined as ‘amounts other than passenger payments paid to an employee for expenses related to the employee’s use of such a vehicle for business travel’.
No liability to income tax arises in respect of AMAPS which is defined in s 230 as ‘M x R’:
● where M is the number of miles of business travel by the
employee (other than as a passenger) using that kind of vehicle in the tax year in question;
● R is the rate applicable, which for cars or vans is 45p for the
first 10,000 business miles and 25p thereafter. Note in the days of the Total People case that starting rate was 40p.
To the extent that an employer does not pay the employee the maximum amount for business mileage, the employee can claim mileage allowance relief directly from HMRC.
Section 231 ‘mileage allowance relief’ states:
‘(1) An employee is entitled to mileage allowance relief for a tax year –
(a) if the employee uses a vehicle to which this chapter applies for business travel, and
(b) the total amount of all mileage allowance payments, if any, made to the employee for the kind of vehicle in question for the tax year is less than the approved amount for such payments applicable to that kind of vehicle.
‘(2) The amount of mileage allowance relief to which an employee is entitled for a tax year is the difference between –
(a) the total amount of all mileage allowance payments, if any, made to the employee for the kind of vehicle in question, and
(b) the approved amount for such payments applicable to that kind of vehicle.
‘(3) Subsection (1) does not apply if—
(a) the employee is a passenger in the vehicle, or
(b) the vehicle is a company vehicle.’ So AMAPS applies only to personal cars.
However, s 232 ‘giving effect to mileage allowance relief’ states:
‘(1) A deduction is allowed for mileage allowance relief to which an employee is entitled for a tax year.
‘(2) If any of the employee’s earnings -
(a) are taxable earnings in the tax year in which the employee receives them, and
(b) are not also taxable earnings in that year that fall within subsection (3),
‘the relief is allowed as a deduction from those earnings in calculating net taxable earnings in the year.’
In other words, if a driver has to use his own vehicle for business purposes and his employer pays him less than the AMAPS amount, the driver can claim tax relief on his tax return or submit a P87 claim for the difference between the sum the company paid for that business mileage and what they could have paid had they used the 45p rate (or 25p after 10,000 miles).
This can best be described as a relief. Had the company paid the driver 45p per business mile in the first place it would have been tax free. Interestingly, however, HMRC is on record as stating that if 45p were not paid to the driver for each business then the company cannot simply provide tax relief for the difference at source via the payroll. The employer either has to pay an amount up to 45p, but if it does not then it is only the driver who can claim tax relief from HMRC for the difference.
For drivers in receipt of a car allowance, most employers pay business mileage at the HMRC advisory fuel rate (AFR), see tinyurl.com/hmrcadfr. These are the fuel reimbursement rates HMRC publishes for company car users.
So, if a driver does 8,000 business miles and the employer reimburses just 10p a mile for fuel, the driver can claim tax relief for 8,000 x 35p (45p – 10p) = £2,800. Tax relief on that amount is either refunded by HMRC to the driver or, more likely, that relief is built into their tax code and they receive it through the payroll system.
HMRC is generally content to give AMAPS relief to drivers at face value without detailed substantiated records that most employers have access to.
The background to the 45p figure is that, over many years, HMRC has taken guidance from the AA to look at the full costs of running a motor vehicle and concluded that 45p a mile was a fair approximation of the costs of insuring, taxing, servicing, repairing, maintaining a car. The 45p includes depreciation – irrespective of whether the driver leases a vehicle (and pays depreciation to the lessor baked into the monthly lease cost) or whether they borrow money from a bank to buy their own car. The depreciation is still a cost/outgoing/loss of having and running that car.
It is an adage in motoring circles that for every 5,000 total miles driven by a car, that car will depreciate a further 6%, or the personal contract purchase lease rate will be 6% higher.
The AMAP rate drops to 25p after 10,000 business miles in each tax year because HMRC – and the AA – take the view that many of the standing or fixed costs associated with use or ownership of a car such as road tax will have been covered or reimbursed by the time one reaches 10,000 miles and so the incremental costs thereafter of running that car drop to 25p on average.
Many companies provide employees a car allowance. This could be for various reasons, such as:
● an extra additional pay or reward, packaged under the heading of car allowance;
● when combined with a lower mileage payment, forms an alternative to paying every driver the full 45p a mile – which was the point made in the Total People;
● a payment in lieu of a company car thereby transferring all the costs of leasing or running that car for business - as
well as private – purposes to the employee, so the employee bears those costs and the risks of ownership, such as damage, theft, insurance deductibles, and excess mileage charges, instead of the employer, again combined with a lower mileage payment, for example, the advisory fuel rate; or
● any combination of the above and it could be something different for every employee.
In practice, companies often set a monthly car allowance which is paid through the payroll and subject to tax and National Insurance in full. The allowance may vary or be suspended if, for example, the driver changes job role, ceases to have a car, or loses their driving licence. The situation will vary from employer to employer and one does have to look at the facts and the evidence – contracts of employment, driver handbook and company policy documents.
To the extent a driver incurs business mileage, they can claim tax relief as described earlier, but this is against their entire salary and is not limited just to the quantum of the car allowance.
Let us assume the annual car allowance is £3,000 and a driver does 14,000 business miles at 10p a mile. The AMAPS income tax relief is [(10,000 x 35p) + (4,000 x 15p) = £4,100], so the car allowance is tax free and a further £1,100 of the employee’s general earnings is also relieved for income tax purposes.
There is nothing contentious in the tax analysis and HMRC accepts the above analysis for tax.
National Insurance treatment of car allowances The Social Security Contributions and Benefits Act 1992, s 3 defines earnings simply as ’remuneration or profit derived from an employment’.
There is the normal meaning of ‘money paid for work or a service’, but remuneration is not fully defined in the Act.
So is a car allowance remuneration? Was it paid to the employee for services rendered by the employee or was it paid to cover expenses the employee is expected to undertake in the performance of their duties (see Pook v Owen 45 TC 571, Donnelly v Williamson  STC 88, Total People)?
The answer is ‘it depends’. But in looking at the facts it is necessary to put weight not only on what did happen, but also on ‘intention’ – what was the payment for? Was it meant as a genuine endeavour with equal fairness to all to cover business expenditure incurred by employees, as in Donnelly, or was it a gratuitous hand-out by the employer with no expectation that it would ever be spent on running a car or on doing any business mileage?
The employee as well as employer intention, the context of the payment and the availability of the private car for business use as well as anticipated business use are important factors in understanding the nature of a payment being made. HMRC states we should look at the historic position, but this is not relevant because the past is no predictor of the future. There is the two-year rule on business mileage (ITEPA 2003, s 339(5)) as well as furlough and Covid restrictions on movement which change travel patterns. So nobody can accurately predict future business/private mileage. One should instead look at intent.
Next, we ask if a car allowance is a profit derived from employment. To the extent that there is no business mileage for a particular driver and the whole car allowance goes towards private use – or is not spent on a car at all – it is a profit for that driver. But for another driver, if the whole allowance and more is spent on maintaining a car and carrying out business mileage, then the answer is it is not profit.
Do we look at each driver individually and decide specifically whether to include the car allowance in earnings or do we look at the entire workforce?
The answer is that, of course we should look at every driver individually, because earnings relate to an ‘earner’ not a ‘workforce’ or ‘department’ or ‘site’. The law to my reading, tries to deal with this question in a most elegant way. It seeks to include the payment of a car allowance as earnings but only to the extent it does not relate to business mileage. It does this in the Social Security (Contributions) Regulations
SI 2001/1004, reg 22A ‘amounts to be treated as earnings in connection with the use of qualifying vehicles other than cycles’ which states:
‘(1) To the extent that it would not otherwise be earnings, the amount specified in paragraph (2) shall be so treated.
‘(2) The amount is that produced by the formula – ‘RME – QA
RME is the aggregate of relevant motoring expenditure within the meaning of paragraph (3) in the earnings period; and
QA is the qualifying amount calculated in accordance with paragraph (4).
‘(2A)But the amount in paragraph (2) is taken to be RME (without the subtraction of QA) so far as the aggregate of relevant motoring expenditure is paid pursuant to optional remuneration arrangements. [Note this is effective from 6 April 2018 only.]
‘(3) A payment is relevant motoring expenditure if – ‘(a) it is a mileage allowance payment within the meaning of ITEPA 2003, s 229(2);
‘(b) it would be such a payment but for the fact that it is paid to another for the benefit of the employee; or
‘(c) it is any other form of payment, except a payment in kind, made by or on behalf of the employer, and made to, or for the benefit of, the employee in respect of the use by the employee of a qualifying vehicle.
‘Here “qualifying vehicle” means a vehicle to which ITEPA 2003, s 235 applies, but does not include a cycle within the meaning of Road Traffic Act 1988, s 192(1).
‘(4) The qualifying amount is the product of the formula – ‘M x R
‘M is the sum of-
‘(a) the number of miles of business travel undertaken, at or before the time when the payment is made –
(i) in respect of which the payment is made, and
(ii) in respect of which no other payment has been made; and
‘(b) the number of miles of business travel undertaken –
(i) since the last payment of relevant motoring expenditure was made, or, if there has been no such payment, since the employment began, and
(ii) for which no payment has been, or is to be, made; and
‘R is the rate applicable to the vehicle in question, at the time when the payment is made, in accordance with ITEPA 2003, s 230(2) and, if more than one rate is applicable to the class of vehicle in question, is the higher or highest of those rates.’
In other words if the car allowance escapes the definition of earnings on the first round, reg 22A comes into play to deem the car allowance to be earnings, assuming that we all accept that the car allowance is ‘any other form of payment made by the employer, and made to the employee in respect of the use by the employee of a qualifying vehicle’.
As an example, a driver receives an annual £5,000 car allowance. Let’s assume that as in the Total People case, the car allowance is a payment towards the business use of the employee’s car and is not caught as earnings under general principles. The driver does 12,000 business miles and is paid 10p a mile – £1,200 – for his fuel in addition to the car allowance.
His total RME is £1,200 under reg 22A(3)(a) plus £5,000 under reg 22A(3)(c) = £6,200.
M = 12,000 and R = 45p so QA = M x R = £5,400
So £6,200 - £5,400 = £800 is deemed to be earnings under reg 22A and is subject to National Insurance .
This seems a sensible outcome in that it broadly matches the tax result.
Note there is no reference to any linkage to business use or requirement to use the vehicle on business in reg 22A. The payment can be entirely for private use and still be an RME as defined.
For completeness we should consider ITEPA 2003, s 235 which defines vehicles:
‘(1) This chapter applies to cars, vans, motor cycles and cycles. ‘(2) “Car” means a mechanically propelled road vehicle
which is not –
a) a goods vehicle,
b) a motor cycle, or
c) a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used.
‘(3) “Van” means a mechanically propelled road vehicle which –
a) is a goods vehicle, and
b) has a design weight not exceeding 3,500 kilograms and which is not a motor cycle.
‘(4) “Motor cycle” has the meaning given by Road Traffic Act 1988, s 185(1).
‘(5) “Cycle” has the meaning given by s 192(1) of that Act. ‘(6) In this section –
‘“design weight” means the weight which a vehicle is designed or adapted not to exceed when in normal use and travelling on a road laden;
‘“goods vehicle” means a vehicle of a construction primarily suited for the conveyance of goods or burden of any description.’
HMRC seemed to agree in Total People that the car allowance would be an RME if it were not otherwise earnings, but it has since resiled on that point arguing that car allowances are not RMEs unless some, frankly, unrealistic tests are met. These are tests invented by HMRC and not to be found in legislation. They suggest that the mileage of every driver has to be analysed on a regular basis and the car allowance altered up or down to reflect the actual usage – otherwise it does not believe that the car allowance is a payment ‘for the use’ of a car.
Note also that the legislation does not use the term ‘for the use’ but says ‘in respect of the use’ which has a much wider nexus.
If, however, HMRC is right and the car allowance in Total People was not an RME as defined above then it would have escaped National Insurance altogether and not simply that element that related to actual recorded business mileage. Surely that is a nonsense and would open the floodgates to potential abuse. The reg 22A net is cast very wide to catch such abuse and yet HMRC insists on a very narrow reading which would lead to abuse.
Another example where HMRC’s interpretation would lead to an odd result is if the employer agrees to pay an amount to the employee to rent his car on a purely arm’s length basis such that his car or indeed other cars within his household, are available to the employer either to ask the employee to undertake business mileage or indeed for other staff to undertake business mileage.
The employee will have to report the rental income as such on their tax return but the National Insurance position is less clear cut.
An arm’s length payment for National Insurance purposes to rent an asset used for business would not necessarily be a payment in return for the employee’s services. It could fall outside the general definition of earnings for National Insurance – under the profit and remuneration definitions.
To my mind, reg 22A would bring such a payment rightly back within the scope of National Insurance. But, because the payment is, according to HMRC, not directly linked to or calculated with respect to the level of business mileage of that vehicle this leads to the conclusion that it is not an RME and escapes National Insurance altogether.
Finally, we look at Sch 3 of SI 2001/1004. In the same way that Part 4 of ITEPA 2003 looks at exemptions from general earnings, Sch 3 looks at payments to be disregarded in the calculation of earnings for the purposes of earnings-related contributions. Included at part VIII are travelling, relocation and other expenses and allowances of the employment, which it states ‘are disregarded in the calculation of an employed earner’s earnings’.
Note the difference here between tax relief which are deductions from earnings whereas for National Insurance, we have a mandate to disregard particular items at the time they are paid. This is why we have the Laing case and other cases under appeal currently – because the amounts were not disregarded by the employer, National Insurance was paid over in error and these companies have submitted claims for a refund.
So what further statutory disregards are mentioned in part VIII?
Paragraph 3 looks at a contribution to travel costs. The car allowance, or at least part of it, is without doubt a contribution towards those costs. This was the point in the Total People case where the driver had a choice of either 45p for each business mile or a lower rate (say 10p a mile) plus a lump sum. There is no reference in para 3 to RMEs so as long as we are content that the car allowance or that part relating to any National Insurance relief claim, is a contribution to business travel, that would appear to be the end of the matter.
Similarly in para 9 we look at either distinct payments towards business expenditure (which includes travel in the performance of one’s duties) or a contribution towards those expenses, though its scope is narrowed further into the regulation.
Finally, to paraphrase para 7A, it simply states take the formula in reg 22A(4) and disregard it from earnings – that is, disregard 45p x number of business miles driven. Note the explanatory notes to para 7A state that it was brought in to mirror as closely as possible the reliefs for tax – the AMAPS = business miles x 45p.
Using the example of the employee receiving the annual
£5,000 car allowance this para says to disregard 12,000 miles x 35p (since 10p has already been paid) = £4,200 leaving only
£800 subject to National Insurance, just as we calculated earlier.
The points in dispute with HMRC in the Laing case were:
● Earnings – was the car allowance earnings on general principles?
● Was the car allowance an RME as defined in reg 22A?
● Does the heading in para 7A form part of the law or interpretation of that paragraph?
Subsidiary to this last question are:
● What is the ‘it’ in para 7A that is being disregarded?
● Does ‘it’ have to be an RME before we can apply the QA disregard?
● Is the disregard limited to the RME or is it against entire earnings – as it is for tax purposes?
The answers are critical to the outcome of the Laing case and will be revealed in part two of this article.
● Travel expenses for employees: tinyurl.com/cu3bbyjk
● Total triumph: tinyurl.com/4pt7hada
● Company car leasing arrangements: tinyurl.com/yy9d7caz