Date posted: 20th Sep 2023
A recent challenge at a tax tribunal could pave the way for employers and employees to save national insurance where they offer a car allowance instead of a company car.
In the cases presented to the tribunal, the employer had car schemes that allowed the employees to choose between a company car and a cash allowance.
If the employee chose the latter, they were required to maintain a vehicle suitable for private use but they were not required to spend the allowance on motor expenses. The car allowance was subject to PAYE tax and national insurance – for both the employer and the employee.
The issue came when mileage allowance was then claimed for travelling business miles.
Recap – mileage allowance
An employer can pay up to 45 per mile (for the first 10,000 miles) and 25p thereafter to an employee who uses their own car for business mileage. This is a tax-free and national insurance-free payment intended to cover not only the fuel costs but also the depreciation, servicing, maintenance etc of the vehicle. There is no obligation for the employer to pay at those rates and indeed tax relief can be claimed on the difference between the amount that the employee could claim under the HMRC rates and the amount the employer has paid.
Employers providing car allowances sometimes pay lesser amounts to simply cover the fuel given that they deem that they are paying for the actual car by paying the employee a car allowance.
Where is the saving?
The saving comes from a technical position in the national insurance legislation regarding “relevant motoring expenditure” as these can be paid without the deduction of national insurance. This is why there is no NIC on the mileage allowance. However, if mileage allowance is paid at less than HMRC rates, it could be argued that some of the car allowance payments fall within the “relevant motoring expenditure” and thus are payable without national insurance.
Therefore given that national insurance will have been calculated on the full car allowance, an adjustment may be required.
Can HMRC appeal?
HMRC have decided not to appeal against the ruling. However, they could well change the legislation going forward but retrospective claims should be considered assuming that there are good records retained to justify the claim.
If you feel that you are impacted by this tribunal case, please contact our tax team for further information to discuss whether a claim should be made.
