Willmott Dixon has won its appeal against HMRC to reclaim back overpayment of Class 1 National Insurance Contributions on cash allowances paid to drivers, potentially vindicating current and future wider fleet claims for NIC relief worth millions.

The Willmott Dixon case relates to whether the car allowance payment was earnings subject to NIC, and has many links to two previous tax cases

The landmark case – expected to prove of interest across the fleet sector – relates to car allowance payments paid by the construction and fit-out company to its grey fleet drivers, alongside a reduced mileage allowance payment for business travel.

Represented by tax consultancy firm Innovation Professional Services Ltd, a specialist in all matters relating to the taxation of car allowance as well as fuel and company cars, Willmott Dixon (WD) appealed against HMRC for its refusal to refund Class 1 NICs for the period from 2004/2005 to May 2014.

The legal victory, which could open the door to other claims, is the latest development in a series of legal cases between HMRC and fleet operators paying cash allowances to their grey fleet drivers.

The background

The case, which was heard in the First Tier Tax Tribunal in late 2021, relates to whether the car allowance payment was earnings subject to NIC, and has many links to two previous tax cases.

Back in 2012, 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 payments to staff and whether those payments were exempt from NIC, in part or in full.

Under the AMAP rules in place at the time, Total People Ltd could have paid 40 ppm (now 45 ppm) for business mileage tax and NIC free. Instead, it paid staff driving over 2,500 business miles p.a. roughly 12-13 ppm through expenses plus an additional car allowance. The car allowance was paid via a fixed monthly amount in addition to their salary to compensate drivers for using their private cars on company business.

Total People argued that as the payments were made to employees in lieu of a tax-free AMAPs mileage payment then they were not earnings on general principles. They were nonetheless Relevant Motoring Expenditure (RME – a technical term defined in the NIC Regulations as including any form of payment to the employee ‘in respect of the use’ of their cars) and therefore were still exempt from NIC but only up to the qualifying amount (QA) for business mileage driven by employees. The QA is roughly in line with the AMAP rules at the time. So drivers claimed tax relief via AMAPs and the company claimed NIC relief on the same mileage for itself and its staff via their tax claims.

While this was upheld in the First Tier Tribunal, HMRC appealed and the decision was overturned by the Upper Tribunal judge in favour of HMRC. However, Total People (TP) then took it to the Court of Appeal, which restored the finding of the First Tier Tribunal in its favour and said the payments were not earnings and the first 45p was NIC exempt – as well as being tax exempt.

This TP case was hailed as a legal precedent for fleet NIC claims. Since then, more than 250 large corporates have submitted protective claims along similar lines and even individuals have submitted their own claims, according to John Messore, Managing Director at Innovation – which has been running similar claims for other clients for years and has expert knowledge of the subject.

Also per John Messore via a Freedom of Information request, he conceded that many companies have withdrawn their claims, but there is nothing at all to now stop those same companies and others submitting new protective claims in light of the WD decision.

A similar case by Laing O’Rourke Services Ltd (LOR) in February 2021 spelled an initial setback for other taxpayers when it was decided in favour of HMRC. The case centred around a claim made in 2010 by the construction company that it too was entitled to an NIC refund on business mileage undertaken by staff on a cash allowance up to the 45 ppm. That claim was also worth several £ million.

LOR lost on a technicality because they had not sufficiently demonstrated that the car allowances paid were connected with or “in respect of the use of the employee’s car” and therefore did not fall into the definition of Relevant Motoring Expenditure (RME). If they had been able to demonstrate this, then NIC relating to the business mileage element would have been due back to the company.

Laing has now applied for permission to appeal against that decision and permission for the appeal was granted at the same time as the Willmott Dixon hearing.

The Willmott Dixon case

The Willmott Dixon appeal was conducted in the First Tier Tribunal Tax chamber some nine months after the Laing case and saw the firm, as with Laing and Total People, claim that NIC refunds were due in respect of car allowance payments paid to some of its employees during that period up to the QA, i.e. the 45p per business mile.

Car allowance payments varied by grade of each employee; the more senior an employee, the higher the grade, the higher the allowance. The allowance was intended to cover the general (non-fuel) running costs of a private car, used for business purposes, with a break-even for the employees at around 10,000 business miles. In addition, business mileage payments were paid to reimburse an employee for the fuel costs of actual business miles driven at HMRC Advisory Fuel Rates.

HMRC’s position was that these car allowances were earnings within the meaning of section 3(1) Social Security Contributions and Benefits Act 1992.

HMRC also argued that the car allowance covered the acquisition of the car, which was not considered as being for the use of the car and therefore did not qualify as RME.

HMRC also noted that the car allowance payments did not vary according to mileage and said that business mileage was inconsistent with the grades allocated to the employees and their respective allowances.

But Willmott Dixon said the allowance were not earnings because there was a good correlation between the amount paid and the level of business mileage undertaken, with the odd winner and loser but a fair, consistent and reasonable method with a break-even point at around 10,000 business miles.

The judgment

In his findings of fact, Judge Popplewell noted that there were winners and losers on the Willmott Dixon scheme and as a result, he took the view that the link was not close enough to say that it was not earnings.

But he did say that the cash allowances were RMEs.

He added that the Total People case had set out the relevant principles and that he was bound by it. The judge also noted that he had reached the same conclusion as the judge in the LOR case; that in order to be the Qualifying Amount (QA), the allowances must be RME.

But he reached a different conclusion from Judge Bowler in the LOR case and said that a car allowance did not necessarily need to be fully used on business mileage to fall within the definition of RME. He also said that mere availability for use or expected future use also brought the car allowance payment into the definition of RME, and the appeal was therefore allowed.

The reaction

Commenting on the judgment, a spokesperson for Willmott Dixon said: “We are pleased that the First Tier Tribunal upheld our claim for historic overpayments of National Insurance. We always firmly believed that our claim was within the spirit as well as the drafting of the relevant tax legislation, so were delighted to see the judge find in our favour.”

HMRC meanwhile is “considering this decision”, according to a spokesperson.

Innovation’s John Messore has said that while the judgment was not “necessarily binding on other cases” it does however “shine a glimmer of light on all the other protective claims that have been submitted”.

He also stressed the need for businesses to have comprehensive, robust and watertight measures and documentation in place for their cash allowance schemes.

“The key thing about a claim to be successful is that the documentation and policy relating to the car allowance has to be correctly worded when it comes to the reasons for its payment and what the obligations of the driver are in return for the payment. You also need to have the business mileage records to support your claim.”

Messore also said that the overriding message from this appeal is that you have got to have a mechanism in place to capture mileage data – but so many fleets don’t have mileage measurements in place.

He continued: “If companies don’t already have a robust tax compliant online mileage system then I would certainly encourage them to consider getting such a system. Having reviewed virtually every system out there I would certainly recommend Traxmiles as an option.”