HM Revenue and Customs has lost a legal case over Class 1 National Insurance Contributions for opt-out drivers in a landmark move that opens up the possibility of multimillion-pound refunds to UK businesses with grey fleets.

Innovation LLP has said the judgment could open the floodgates to thousands of claims across the UK

It’s the latest instalment in two separate and long-running legal battles between HMRC and Willmott Dixon and Laing O’Rourke Services Ltd over cash allowances paid to drivers and has now seen both firms successfully argue that such allowances were not earnings but instead Relevant Motoring Expenditure and therefore do qualify for relief from Class 1 NICs.

The case was carried out by the Upper Tribunal Tax & Chancery in March 2023 and judgement was announced this week (see full details here).

These two appeals were heard together because they raise similar issues as to liability for Class 1 NICs. Laing was appealing a decision of the First Tier Tribunal (FTT) from June 2021, when the construction company lost its appeal against HMRC’s decision that it was not entitled to repayment of NICs on car allowances from 2004/05 to 2017/18.

Meanwhile, HMRC was appealing last year’s win by Willmott Dixon in the First-tier Tribunal against HMRC for its refusal to refund Class 1 NICs for the period from 2004/2005 to May 2014.

The claims equate to £2.2m of NIC relief for Laing, which was represented by Deloitte, and £1.5m for Willmott Dixon, which was represented by tax consultancy firm Innovation Professional Services.

Total People case provides legal precedent

Both firms have a basis in a legal precedent that dates back to 2012, when Total People Ltd (later called Cheshire Employer and Skills Development Limited) won a seven-year battle against HMRC in the Court of Appeal over its car allowance payments to staff and whether those payments were exempt from NIC, in part or in full.

Total People’s claim was founded upon the made by the training firm to around 160 members of staff using private cars on business. Under the AMAP rules in place at the time, Total People could have paid 40ppm (now 45ppm) for business mileage. Instead, it paid staff 12-13ppm through expenses plus an additional car allowance, which was paid by way of a fixed monthly amount in addition to their salary to compensate for using private cars on company business.

Total People argued that as the payments were made to employees in recognition of the fact that their job required them to use their car for business, they must be payments of Relevant Motoring Expenditure (RME) and therefore exempt from NIC as they were in line with the AMAP rules at the time. The claim was worth £146k to the employer but also involved refunds of drivers’ NICs.

While this was upheld in the First Tier Tribunal, HMRC appealed and it was overturned by the Upper Tribunal judge in favour of HMRC. However, Total People took it to the Court of Appeal, which restored the finding of the First Tier Tribunal in its favour and judged that the first 45p was NIC exempt – as well as being tax exempt.

At the time, the Total People was hailed as a legal precedent for fleet NIC claims and led to many large corporates submitting protective claims along similar lines.

However, in June 2021, Laing lost its claim to a refund of NICs in a three-day trial in the First Tier Tribunal tax chamber after the Judge ruled that the company had not sufficiently demonstrated that the car allowances paid were in respect of the use of the employee’s car and therefore did not fall into the definition of Relevant Motoring Expenditure – if they had been able to demonstrate this, then NIC relating to the business mileage element would have been due back to the company.

However, Laing has now won its appeal. In its verdict this month, the Second Tier Tribunal judged that the FTT had “erred in adopting a narrow definition” of Relevant Motoring Expenditure. It allowed Laing’s appeal in this respect and set aside the FTT’s decision, which means HMRC is not entitled to repayment of NICs paid in relation to car allowances.

In this week’s judgment, the Second Tier Tribunal also upheld last year’s legal win by Willmott Dixon on grey fleet NIC claims, despite an appeal by HMRC. As with Laing and Total People, Willmott Dixon had claimed that NIC refunds were due in respect of car allowance payments paid to some of its employees during that period up to the Qualifying Amount, i.e. the 45p per business mile, but HMRC had refused.

The Second Tier Tribunal has now judged that the FTT in the Willmott Dixon appeal made no error of law in concluding that the payments are RME within regulation.

Also worth of note was the  judges’ ruling that the definition of RME is concerned with the nature of the payment by the employer to the employee; particularly, whether it is in respect to the use of a car. They also said that RME should be given a wide meaning which includes expected use, potential use and availability for use.

HMRC has 30 days from the date of judgement to lodge an application with the Court of Appeal.

However, John Messore, Managing Director at Innovation Professional Services Ltd – which represented Willmott Dixon in both legal cases – has said that the judgement could open the way to many similar claims across the UK.

For many years he has urged fleets and individual drivers with a car allowance to submit their own protective claims. These can be high level for now and be followed up later with more detailed computations.

“We are aware that some other firms have advised their clients not to bother with this particular opportunity and personally I think it is regrettable since not only could those companies miss out but so too could their staff. I would urge all businesses to speak with a specialist and put a claim in if appropriate.”

He added: “You’ve got nothing to lose by putting in a claim, since it can always be withdrawn later in the event that HMRC appeals and goes on to eventually win. The best strategy is also to ensure you also have a robust mileage capture system such as Traxmiles so that you can support claims for future years.”

Messore, who has been running similar claims for other clients for over 12 years and has expert knowledge of the subject, added: “There is always a risk of a law change and so the sooner you claim the more you are likely to receive in the long run. You can also only claim back for the current plus prior six tax years so you need to stake a claim now. Companies have little to lose and everything to gain by getting expert advice in this area.”

John Messore can be contacted on 0788 4006164 or at [email protected]