Lump sum motoring expenses subject to NICs if not linked to mileage, tribunal says

The ruling should lead companies to "urgently review" their mileage policies, a tax law expert said.

HM Revenue and Customs (HMRC) successfully overturned a first-tier tax tribunal (FTT) decision which found that the allowances, paid to employees who used their cars for business purposes, were not subject to NICs.

Training organisation Total People Ltd, now known as Cheshire Employer and Skills Development Ltd (CESDL), paid motoring expenses of 40p per mile to employees expected to travel less than 2,500 business miles a year, however employees who travelled more extensively received a fixed lump sum payment in monthly instalments plus a lesser rate per mile.

NICs are paid by both employers and employees on any payments to employees that represent earnings. Special rules apply to payments in respect of "relevant motoring expenditure", on which NICs must be made only to the extent that those payments exceed the qualifying amount for that period.

CESDL argued that it made the payments in the form of a monthly sum to ensure that its employees could meet monthly car hire purchase commitments and not benefit from a rate which made it worthwhile for employees to drive more miles than strictly necessary. The Upper Tribunal agreed that there was nothing to stop the company from making the payments as a lump sum, but those payments had to be linked to mileage before they could be classed as "relevant motoring expenditure".

The company had originally accounted for NICs on its lump sum payments but later concluded that these had been paid in error as they counted towards the qualifying amount. When HMRC refused to reimburse the payments, CESDL appealed to the FTT. The FTT decided that as the payments were made in the form of a lump sum for administrative convenience only and did not increase annually in line with salary they were not earnings, and so NICs were not due.

HMRC appealed to the Upper Tribunal, which held that in order to be classed as "relevant motoring expenditure" the payments had to be linked to mileage. If not, they had to be classed as earnings and taxed accordingly - without any qualifying contribution-free amount.

Judge Colin Bishopp pointed out that there was "no real correlation" between the lump sum payment and the mileage covered by an individual employee. "If the payment is not of relevant motoring expenditure, no [NIC] relief is available," he said.

Tax expert Veronica McMahon of Pinsent Masons, the law firm behind Out-Law.com, urged companies to urgently review their expenses policies after the decision.

"As a result of the decision in Total People, employers will need to look carefully at how they compensate their employees for petrol and other expenses related to the use of their cars for business travel. Employers who make lump sum payments which are not linked to mileage should urgently review their policies to ensure that the correct amount of employers' and employees' NICs has been paid on these sums," she said.

"If employers wish to make use of the beneficial treatment which applies to payments made in respect of 'relevant motoring expenditure' they must make sure that there is some link between the payment and the miles driven. Provided that this link is established, employers should still be able to make such a payment by way of lump sum allowance (rather then on a mile by mile basis)," she said.