CARS - 29.11.2012

Taxman loses battle over NI on car allowances

A court recently ruled that the Taxman was wrong to charge NI on round sum car allowances. But as he’s unlikely to volunteer a refund where you’ve overpaid, what steps do you need to take to get your money back?

Case summary

The case of Cheshire Employer and Skills Development (previously known as Total People Ltd) v HMRC (CESD v HMRC) has been a see-saw affair. First, the tribunal ruled for the company, then the Upper Tribunal reversed this and now the Court of Appeal has turned that decision on its head. This latest judgment means that employers can now go ahead and reclaim NI overpaid on certain employee car allowances.

Round sum allowances

CESD paid its directors and employees round sum allowances for using their own cars on business journeys. The allowance was an annual one, but paid by instalments with each month’s salary. Initially, there was no requirement for the workers to prove how many business miles they travelled.

Taxman’s view of round sums

The Taxman has always taken the view that both employees’ and employers’ NI is payable where a fixed car allowance is paid, unless this is directly linked to the amount of business mileage travelled. Only where it’s directly linked to mileage is the first 45p per mile of a car allowance NI-free. The Court of Appeal disagreed.

Court’s view

The judges said that the Taxman had misinterpreted the law when he insisted the NI exemption can only apply where there’s a link to mileage at the time a car allowance was paid. They considered it sufficient that an allowance is broadly tailored to reflect the scale of a car’s business use. Here are some examples of when the NI-free amount can apply.

Example 1. Your sales reps drive between 10,000 and 18,000 miles per year - you pay them a monthly car allowance of £500. Your engineers travel between 5,000 and 8,000 miles per year; you pay them an allowance of £300 per month.

Example 2. The directors of your company drive larger and more expensive vehicles than the junior staff, but both travel broadly the same amount on business. You pay the directors a monthly allowance of £600 and the staff, £250. The differential is to reflect the higher cost of running a larger and more expensive car.

Ultimately it’s all about mileage

Whilst part of a flat rate car allowance can be NI-free in the situations described above, ultimately, you’ll need to know exactly how many business miles each employee travelled. This will mean getting your employees to draw up a mileage log from their work diaries etc. and formulating a claim from these (see The next step).

Tip 1. A claim for repayment of employers’ and employees’ NI can be made back to April 6 2006.

Tip 2. For the current year you can make an adjustment to the NI payable without notifying the Taxman (seeThe next step). Just knock off the NI overpaid from your next PAYE payment.

Ask your employees to draw up a log of their business miles going back to April 6 2006, if possible. Use our calculator to work out the amount of NI overpaid by your company and employees and submit a claim to HMRC. You can also reclaim NI overpaid for the current year by knocking this off your next PAYE payment.

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