A recent legal case showed that it is possible to reclaim national insurance paid on car allowances.
A recent legal case showed that it is possible to reclaim national insurance (NI) paid on car allowances, writes Paul Webb, a tax partner at accountancy firm Robert James Partnership.
With company cars becoming increasingly less tax efficient, a lot of companies now operate a car allowance and mileage policy. For many companies, that means a sizeable amount of NI contributions are payable on the car allowance.
However, a recent case concerning a training organisation, Total People, highlighted that where an employer pays a car allowance and reimburses employees for their mileage it may be possible for both employers and employees to reclaim NI contributions paid, if certain conditions are met.
Total People was paying a mileage allowance topped up by monthly ‘lump sum’ travel allowance. Initially the company accounted for Class 1 NI contributions on these payments, which amounted to £146,000.
Subsequently, the company challenged HMRC over the payment on the basis that these payments ‘were not paid as earnings’ but ‘were paid as motoring expenses’. The firm was successful in a tribunal proving their case and is now waiting for a windfall refund.
This ruling is significant because it illustrates the potential for other businesses in a similar position to reclaim NI provided they meet certain criteria, which, broadly, are that:
1. Over the past six years, you have paid a car allowance to employees for use of private vehicles on company business which has resulted in additional employer NI contributions
2. Mileage paid to reimburse employees when using their own vehicle on business is less than 40p per mile. This is significant because it is the maximum NI-free amount
3. The car allowance paid is not linked to the employee’s salary
4. Records exist to verify the business mileage paid.
It is also worth highlighting that in addition to employers being entitled to reclaim for NI payments, employees receiving less than 40p per mile for their expenses may also eligible for a rebate. Although this is not something the employer is directly involved with, many employees would appreciate being informed about such opportunities to reduce their tax liability and can undertake the rebate procedure independently, when they complete their tax returns.
The worked example below illustrates how the rebate can amount to sizeable amounts for employers.
During the 2009/10 tax year, Mike Jones, an employee, travels 2,000 business miles every month, which equates to 24,000 over the year. He gets a £500 monthly car allowance for which tax and NI is payable and mileage done in his car is reimbursed at 15p per mile, which is free of tax and NI.
Because for tax purposes, 40p per mile for the first 10,000 miles and 25p thereafter could have been paid to Mike instead of 15p, this means 25p and 10p per mile could also have been paid free of tax and NI. Doing the calculation, this amounts to £3,9000, which means that Mike’s employer can reclaim this sum against the NI paid on his £6,000 car allowance (3,900 x 12.8% = 499.20). The rebate payable to the employer is £499.20. For a small business with 10 employees with similar circumstances to Mike, who have each received a car allowance and mileage expenses over the past 5 years, and this amounts to a sizeable £29,952. Well worth further investigation.
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