Are lump sum motoring expenses liable for NICs as earnings, or exempt up to to 40p per mile?Friday, October 15th, 2010
In a decision given on 12 August 2010 in the case Total People Ltd v Revenue & Customs, the First Tier Tax Tribunal allowed an appeal against an HMRC decision that lump sum payments paid for motoring expenses were part of the salaries of the employees concerned and therefore subject to Class 1 NICs.
Where employees use their own vehicles for business travel, exemptions from both PAYE income tax and Class 1 NICs are provided in the relevant legislation. Mileage allowance payments are liable for tax and NICs to the extent that the payments exceed a threshold value, calculated by multiplying the business mileage by a statutory mileage rate, namely, in the case of cars and vans,
- for tax purposes, 40p per mile up to 10,000 miles and 25p per mile for miles over 10,000 in a year, and
- for NICs purposes, 40p per mile.
There are other differences in the terms of the exemptions, in particular that any liabilities are determined annually in the case of tax (and reported on form P11D) but in each earnings period in the case of Class 1 NICs.
In the case of NICs, HMRCs guidance in its technical National Insurance Manual (see link below) defines motoring expenses as including mileage allowance payments, such as ‘40p per mile’, and regular or one-off lump sum payments, such as ‘£3,600 per year’. However, the guidance is clear that lump sum payments are only exempt if they are paid for the use of the employee’s personal vehicle. The exemption does not apply if the payment is for any other purpose, such as for surrendering entitlement to a company car or to enable an employee to buy a car.
In this particular Tax Tribunal case, the employer, Total People, used two alternative methods of paying motoring expenses:
- a flat mileage rate of 40p, or
- a mileage rate of 12p or 13p, plus a lump sum payment of around £3,600 per year, paid in instalments.
The second payment method was generally used if more than 2,500 miles were travelled on business during the year, largely because it discouraged the drivers from driving unnecessary miles in order to maximise the payments.
HMRC argued that the lump sum payments were liable for NICs in full as earnings, although none of the reasons given demonstrated that they were not paid for the use of the employees’ personal vehicles. The Tribunal, after considering the circumstances in which the lump sum payments were made, in particular because they were not related in any way to the employees’ salaries and were used to control the level of business travel, decided that the payments were motoring expenses and fell within the terms of the NICs exemption.
It is understood that HMRC is considering an appeal against the Tribunal’s decision.