Mileage allowance payments and essential user allowancesSunday, August 28th, 2011
Upper Tax Tribunal confirms that MAPS lump sums are only approved if they are made in respect of relevant motoring expenditure.
In a decision dating back to August 2010 in the case Total People Ltd v Revenue & Customs, the First-tier Tax Tribunal allowed an appeal against an HMRC decision that the lump sum payments in question in this case were not paid for motoring expenses but 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, limited 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 do not exceed a threshold value, calculated by multiplying the business mileage by a statutory mileage rate. At the time, the rates for cars and vans were
- 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, HMRC’s guidance in its technical National Insurance Manual 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 case, the employer, Total People, used two methods of paying motoring expenses:
- a flat mileage rate of 40p, and
- 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. The Tribunal, after considering the circumstances in which the lump sum payments were made, concluded that they were not related in any way to the employees’ salaries and decided that they were motoring expenses and fell within the terms of the NICs exemption.
HMRC subsequently appealed against the decision to the Upper Tax Tribunal and that tribunal’s decision was published on 16 August 2011. The judge agreed that the lump sum payments were made in respect of motoring expenses but questioned whether, as required by the legislation, they met the key condition for being “relevant motoring expenditure”, namely “amounts…paid to an employee for expenses related to the employee’s use of…a vehicle for business travel”. There must be a link between the payment and the use of the vehicle and, as they are called “mileage allowance payments”, there must be a link between the payment and the miles driven. The evidence provided by Total People showed that
- there was no relation, other than by chance, between the payments and the level of use made by employees of their cars,
- the payments were made, not to defray the cost of use but to defray the cost of acquisition or ownership, and
- the rates paid to senior employees using their cars infrequently were higher than those paid to junior employees using their cars extensively.
The appeal was allowed on the grounds that the payments were not of relevant motoring expenditure because they were not paid by reference to, or with regard to, the use by the employees of their cars on their employer’s business.
Neither the original decision of the First-tier Tribunal, nor this new decision of the Upper Tribunal, contradicts in any way HMRC’s published guidance that, for a lump sum payment to enjoy the limited tax exemption, there must be a clear connection between the payment and the use of the private vehicle for business travel. It would be sensible for employers that pay “essential user allowances” (or whatever term they use to describe lump sums that are paid on top of mileage rates) to review the amounts paid to ensure that they are clearly related to the level of business use made by employees in their own cars.