HMRC Challenges Car Allowance Ruling And Wins
Monday, 22. August 2011
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Most employers and employees know that there is a tax and NI free allowance payable of 45 pence per mile when an employee uses his own car for work. This applies to the first 10,000 business miles per annum, after that it drops to 25 pence per mile. If the employer only actually pays 20 pence per mile the employee can claim the difference (25 pence per mile) against tax and NI payable on his salary. However, some employers pay a lump sum, either annually or spread over the year, as well as a mileage allowance but there was an argument that the lump sum could not be paid tax or NI free, even if the total amount paid still fell within the total amount allowed at 45 pence per mile.
Let’s say an employee covered 10,000 business miles per annum he would be allowed 10,000 x 45pence = £4,500 tax and NI free.
But lets say the employee received 10,000 miles x 20 pence per mile = £2,000 plus a lump sum of £2,000 per annum, the total paid would still be less than his allowance.
However the HMRC challenged this saying that the lump sum was not related to the miles so the relief could not be claimed.
At a tribunal in August 2010, the judge ruled against HMRC and in favour of employer, Total People, who had paid employees lump sums of between £3,600 and £3,700 with a mileage allowance of 12-13 pence per mile.
Their argument for doing this was to prevent employees making unnecessary business trips by making it burdensome for them to cover excessive business miles, something the judge took into account when making his ruling.
However, HMRC appealed to the Upper Tier Tribunal at which judge Colin Bishopp overturned the lower tier decision saying 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 employer’s business.’
So if you are an employer making split payments to employees you need to discuss this with your accountants and if you are an employee you may find that the lump sum you may have been paid before is now subject to tax and NI. By Graham Hill
