Accountancy firm Innovation Professional Services has accused HMRC of issuing “incorrect and misleading” guidance on Relevant Motoring Expenditure (RME) and National Insurance refunds following HMRC’s court case defeat earlier this year.

The ruling means employees and employers are now entitled to a refund of priory year NICs paid in error on car allowances and they are entitled to relief going forward

The tax authority lost a long-standing battle over whether cash allowances paid to drivers qualify for relief from Class 1 NICs earlier this year, after the Upper Tribunal Tax & Chancery ruled it had wrongly refused tax relief from national insurance payments paid on such allowances.

The Laing O’Rourke Services Ltd and Willmott Dixon Holdings Ltd v HMRC ruling was all about employees who use their own vehicles for work, are reimbursed by their employer at less than 45p a mile and who also receive a round sum allowance, such as a car allowance, specifically aimed at helping employees to procure and then run their own vehicle on business.

The ruling said that car allowances (paid in respect of actual or future use of a car) should be classed as RME – a defined term meaning the aggregate of all other relevant motoring expenditure incurred by the employer.

HMRC has since confirmed it won’t appeal the decision, which means employees and employers are now entitled to a refund of priory year NICs paid in error and they are entitled to relief going forward.

National Insurance relief is available since April 2002 against some or all of the car allowances paid, just as Income Tax relief is available to employees via the Mileage Allowance Relief (MAR) scheme.

For income tax there is no limit on the relief since it is against all earnings – whereas for NIC the relief is limited to the aggregate of all relevant motoring expenditure. Also, for tax the relief drops to 25p after 10,000 miles but for NIC the relief for cars and vans is always at 45p irrespective of miles driven.

Innovation Professional Services, the firm behind the joint hearing and who advised both Willmott and Laing over the full 13-year period, has now highlighted that HMRC’s November 2023 Agent Update explains how employees and employers can backdate relief claims – but that it says nothing about what to do going forward.

Innovation is advising that for the vast majority of UK companies the car allowance will have been subjected in full to employee and employer NICs via the payroll. Yet, the car allowance was most likely RME all along and therefore relief (or disregard) should have been given at source for the Qualifying Amount, to the extent the employee undertook business mileage and was reimbursed at less than the 45p maximum rate.

John Messore, managing partner at Innovation, commented: “This means that both Primary and Secondary Class 1 NICs (i.e. employee and employer NIC), will have been overpaid by virtually every single UK company which pays a car allowance to staff – unless they had also reimbursed business mileage at 45p from the outset – and thereby used up the QA against the milage reimbursement – leaving no QA left with which to offset part of the Car Allowance, for NIC purposes.

“Given the loss of a tax case at the Upper Tribunal and a U-Turn of their guidance, for years HMRC have misinterpreted a legislative provision leading to overpayments of Secondary NICs and over-deduction and over-collection of Primary NICs from employees.”

However, he has issued some caveats to claims.

“The problem with retrospective claims is limitation, meaning you can only go back to 2017/18 whereas your employer will most likely have overpaid NICs for the 15 tax years prior to that – and there is now no way to recover any overpaid NICs for all of those earlier tax years.

“That NIC has been lost forever – except for a handful of taxpayers who obtained value added advice from firms such as mine and put in protective claims many years ago, which they can now cash in on.”

Messore also warned that HMRC’s new guidance only focuses on cars when this clarification of the law applies to all qualifying vehicles, which even includes motorbikes – but does not include cycles.

He added: “It is also a bit rich for HMRC to say NICs are no longer due. The NICs were never due and were only paid because of misleading guidance from HMRC.

“Also, what does ‘to be successful all the existing rules still apply’ Which existing rules? What do they mean by ‘if evidence cannot be provided’? or what do they mean by ‘relevant evidence’? in para 10 or ‘by providing the reference of the relevant motoring expenditure’ in para 12?

“It is clear that HMRC sadly have not even read the legislation and nor do not understand how OpRA operates. They say: ‘No disregard is available on payments made that are within the definition of relevant motoring expenditure if salary is sacrificed from an individual’s pay.’ This is absolute nonsense!

“At no point in the relevant regulation Para 7A does it talk about salary sacrifice. Instead, it says ‘Sub-paragraph (1) does not apply so far as the payment of relevant motoring expenditure within the meaning of regulation 22A(3) is made pursuant to optional remuneration arrangements’.

“If you read the Optional Remuneration Arrangements (OpRA) regs, at no point does it mention the words salary sacrifice. OpRA and salary sacrifice are completely different. OpRA has many carve outs, Special Case Exemptions and General Exclusions from exemptions (excluded exemptions). To simply quote ‘salary sacrifice’ is sloppy and technically inaccurate.

“Indeed, it is possible that there has been no salary sacrifice but you are still caught by OpRA meaning you don’t get the relief.

“It would have been far better if HMRC had sent me a draft to correct before they released it to all taxpayers.

“Despite the OpRA legislation being over six years old many taxpayers and their agents or accountants still don’t understand how that operates.

“They also say, ‘Businesses with a similar fact pattern to the Upper Tribunal cases will be able to correct any overpayment’. How is any taxpayer going to know if their fact pattern is similar to Laing O’Rourke when they have not seen any of Laing’s policies or documentation used in the Court case? At Innovation we do know what is in Laing’s policy and also Willmott Dixon because we did a lot of the work behind the scenes over the years including writing some parts of the policy culminating in a victory for the taxpayers.

“Willmott and Laing were both able to submit annualised claims. HMRC is now suggesting that any new claim has to be by pay period. For weekly paid staff that means recalculating up to 364 (7×52) payslips to arrive at the revised NIC figure due as a result of now retrospectively applying the correct disregard.

“Next, it seems completely impracticable to push taxpayers down the route of correcting up to 84 (7 x 12) RTI submissions for monthly paid staff when other taxpayers have been able to claim on a spreadsheet. Even if they allow a year end submission to be corrected taxpayers might still have to recalculate every week or month in any event to get the figure correct to the penny.”

Innovation is advising a ‘common sense approach’ whereby employers who deducted NIC in the first place based on HMRC guidance now submit a claim for the company and the employee. This is because the employer is far more likely to hold all the historic data centrally than the employees – and some former employees won’t even be able to access historic mileage data.

Messore also warns that while the HMRC update also asks the employees to calculate the primary refund, this will have to include those months where the rate was actually 13.25% because of the Health and Social Care Levy. And he says that for any employee at the cusp of 12%/2% NIC, “this will be a mathematically impossible task”.

Messore continued: “HMRC can and sometimes do provide easement for all taxpayers and so rather than pushing employers down the route of resubmitting thousands of RTI corrections HMRC should a) allow spreadsheet claims, b) on an annualised basis and c) encourage every employer to either i) submit a claim using a reputable expert such as Innovation Professional Services Ltd or ii) write to all staff to the effect that the company has no intention of claiming and staff should make their own NIC claims.”

He also warned of problems with the latter option whereby employers will still need to provide all employees with sufficient data to make a claim, which could entail more work than if employer simply submits a claim itself.

Another cause for concern is if an employee submits a claim for Primary NIC refunds – will that automatically trigger a refund of Secondary Contributions to the employer – and how will HMRC make all those refunds?

Messore summed up: “Having specialised in this area and successfully advised clients for the last 18 years on this one subject, I am afraid the general public who rely on HMRC guidance will be none the wiser reading the update and may make incorrect decisions which will come back to bite them in the future.

“Finally the one thing that worries me most is other accountants jumping on the bandwagon, when for 20 years they were nowhere to be seen, suggesting that they can help taxpayers recover NIC, but lacking the sufficient knowledge to know if the client or taxpayer has any skeletons in the closet that will now come to the fore as a result of putting in a claim and triggering a load of new questions from HMRC.

“So, as ever I urge caution and suggest you really do get the best advice.”