Opportunity to reclaim NIC on business mileage for employees receiving car allowances

Following the cases of Laing O'Rouke and Wilmott Dixon recently decided in the Upper Tier tribunal, a precedent has been set for the potential reclaim of Employer and Employee Class 1 National Insurance Contributions (NIC).

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Stephen Greenaway
Published: 25 Oct 2023 Updated: 25 Oct 2023
Business tax Tax

If employers pay a car allowance and pay less than the Approved Mileage Allowance Payments (AMAP) for business mileage​, employers and employees may be entitled to reclaim overpaid NIC. There is an opportunity to reclaim overpaid NIC for the last six years, which could result in a significant windfall to both employees and employers.

Background

It is common for employers to offer car allowances to employees who use their own cars for business travel. Often, employers have a policy to reimburse mileage at the company car fuel advisory rates or some other amount less than the AMAP rates for these employees. The AMAP rates are £0.45 for the first 10,000 miles and £0.25 thereafter.

Where reimbursement has been made at less than the AMAP rates, employees are entitled to claim tax relief on the difference between amount received and the AMAP rate. For example, if an employee is reimbursed at an average rate of 10p per mile and travels 10,000 business miles in a tax year, they are entitled to claim a tax deduction of (£0.45 - £0.10) x 10,000 miles = £3,500.

Up until now, there has been no clear precedent around claiming any relief for NICs, amounting to a mismatch between the tax and NIC treatment.

Opportunity to reclaim overpaid NIC

Following the outcome of the above cases, which HMRC have decided not to appeal, there is now a basis to reclaim the overpaid NIC contributions.

Continuing the above example, NICs will have been overpaid on the amount eligible for tax relief of £3,500. Employer NIC would have been charged at 13.8% (£483) and in the case of an employee earning below the Upper Earnings Limit, employee NIC applied at 12% (£420).  Over six years, this employee could be due a refund of £2,520 of employee NIC and the employer would be due a refund of £2,898. If there were circa 100 eligible drivers, under the same assumptions this could result in an employer and employee NIC refund in the region of £0.3m and £0.25m respectively.  

Which conditions need to be met to reclaim overpaid NIC?

Employers should strongly consider reviewing the merits and quantum of a claim and if appropriate lodge a repayment claim for the overpaid NIC relief for the last six years where the following conditions are met:

  1. A car allowance has been paid to a population of employees;
  2. This employee population has undertaken business travel in their own cars and received reimbursement for this at less than the AMAP rates;
  3. The car allowance qualifies as ‘relevant motoring expenditure.’

Whether the car allowance qualifies as ‘relevant motoring expenditure’ depends on the nature of the payment and the intentions and requirements of its use, as set out in the relevant documentation. Many allowances will meet this definition, particularly where the key purpose of providing the allowance is for an employee to maintain and insure a car for business travel.

What are the next steps?

Our dedicated Employer Solutions team is working with a number of clients to review and lodge claims with HMRC. We offer an initial free of charge discussion to review the merits and possible quantum of your claim and if you would like to proceed, we can submit this to HMRC. Please get in touch if you would like to discuss this.

Approval code: NTAJ14102358

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

Tax legislation

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.