Reclaiming NIC on car allowances – HMRC’s new guidance

HMRC have published initial guidance on reclaiming NIC paid on car allowances – here’s what you need to know

What you need to know

The recent Upper Tribunal (UT) decisions in the Laing O’Rourke and Willmott Dixon cases mean that, in certain circumstances, employers can reclaim National Insurance Contributions (NIC) paid on employee car allowances if they reimburse business mileage at a rate of less than 45p per mile. For some employers, these reclaims may be substantial. HMRC have now published initial guidance on how to reclaim historic overpayments. This article summarises key points from HMRC’s new guidance and sets out what employers should consider doing now.

The UT cases and their implications

Both Laing O’Rourke and Willmott Dixon operated schemes that let employees choose either a company car or a car allowance. Employees who chose to receive the car allowance were required to maintain a private vehicle for business use, but were not required to spend their car allowance on actual motoring expenses.

Both employers took the position that their car allowance payments were ‘relevant motoring expenditure’ that qualified for NIC relief on the ‘qualifying amount’ of 45p per business mile travelled less, broadly, any business mileage reimbursed (and which had already benefited from NIC relief).

Agreeing with the employers, the UT held that ‘relevant motoring expenditure’ (RME) has a broad meaning. It includes payments for the expected use, potential use, and availability for use of a qualifying vehicle – and not only payments in respect of its actual use. The UT also held car allowance payments quantified by reference to employees’ grades and the absence of a requirement for the allowance payments to be used for actual motoring expenses did not preclude the allowances from qualifying as RME.

These Tribunal decisions, which HMRC decided not to appeal, mean that employers with car schemes comparable to those in the Laing O’Rourke and Willmott Dixon cases may reclaim NIC paid on car allowances as far back as 2017-18 (or earlier, in certain circumstances). Note, however, that car allowance payments made on or after 6 April 2018 under ‘optional remuneration’ or other salary sacrifice arrangements do not qualify for NIC relief.

NIC relief may also be due on allowances paid going forward, although the mechanics of recovering this are still being considered.

HMRC’s new published position

HMRC have published an article that sets out initial guidance for employers and employees on reclaiming relevant NIC (further guidance is expected).

In summary, employers can reclaim NIC where:

  • Car allowances were paid subject to NIC which have ‘a similar fact pattern’ to those in the UT cases (see above);
  • Sufficient evidence is available to support the number of business miles driven by each employee in each pay period and this is available for inspection by HMRC; and
  • The employer can demonstrate that any business miles reimbursed (or other ‘relevant motoring expenditure’ paid subject to NIC relief) was at a lower rate than HMRC’s highest approved mileage allowance for the period.

The default position is that NIC reclaims should be made by amending the relevant Real Time Information (RTI) returns. However, employers who cannot do so can submit written repayment claims, but must explain why the RTI returns cannot be amended.

Employers who are dealt with by HMRC's Large Business Directorate should make claims through their Customer Compliance Manager.

Employers claiming refunds of employer NIC should also consider how they will process repayments of employee NIC to the affected individuals. HMRC’s guidance directs employees who think they are eligible for NIC relief to contact their employers in the first instance, so it is important to make employees aware of any plans to submit a reclaim.

What should employers do now?

Employers should act now to consider submitting NIC reclaims before earlier tax years become time barred (in particular, any claim in respect of the 2017-18 tax year must be prepared and submitted on or before 5 April 2024).

Specific questions employers should consider when assessing their position include:

  • Do you have a ‘similar fact pattern’ to the Laing O’Rourke and Willmott Dixon UT cases? This is fundamental to any claim. In some cases, this assessment will need subjective judgements that could benefit from third party review and assurance (e.g. whether there was a sufficient obligation on your employees to maintain a private car that is available for business use);
  • Did employees sacrifice or otherwise forgo earnings for a car allowance payment under ‘optional remuneration’ arrangements? If so, car allowance payments made on or after 6 April 2018 will not qualify for NIC relief. This is a complex and relatively untested area of legislation. The position may not be clear, so it is important to understand exactly how your car allowance scheme works and take specialist advice where required;
  • Do you hold the information HMRC require to support a NIC reclaim? For each employee and pay period for which you intend to submit a reclaim, do you have accessible, complete, and robust evidence of the car allowance payments made, the number of business miles driven, and any other ‘relevant motoring expenditure’ payments (e.g. reimbursed business mileage below the applicable HMRC rate) made?;
  • How many years could you go back? Claims can go back to 2017-18 (which must be submitted on or before 5 April 2024) and, in certain circumstances, might be made for earlier years – provided in all cases that they can be appropriately evidenced;
  • Can you process reclaims by amending Payroll RTI returns or, if not, could you justify to HMRC the basis for a written claim? As outlined above, HMRC’s default position is that NIC reclaims should be made by amending the relevant RTI returns. This can be complex and time consuming. As such, it is essential you work with your Payroll team to agree the approach that will be taken, before submitting the claim;
  • Are you comfortable that all controls and processes in respect of claims for business mileage are robust, e.g. don’t include any home to work travel? This should be considered before making a reclaim, as the reclaim might potentially trigger a wider compliance review as well as scrutiny of your supporting records;
  • What’s your employee communication strategy? You need to plan how you will communicate with employees – including if you don’t intend to make a claim that they might expect – and manage their expectations on the likely timescales for HMRC reimbursing the relevant employee’s NIC and the sums involved. You’ll also need to consider what to do about employee’s NIC for any former employees who might be covered by your claim; and
  • How does your reclaim support other initiatives e.g. support with the cost of living crisis? There may also be an opportunity to share details of business mileage for historic years with employees to support them in recovering tax relief where this hasn’t already been claimed.

KPMG in the UK has extensive experience assisting employers to reclaim NIC on qualifying car allowance payments. If you would like to discuss this, or any aspect of your company car arrangements, please contact the authors or your usual KPMG in the UK contact.