9.8.2023 | Tax

A mileage tax case: What can be claimed?

Beatons explains what happens when an employee is paid mileage at less than the Approved Mileage Allowance.

HMRC recently lost a 12-year-long tax case which will pave the way for employers to reclaim some National Insurance related to mileage costs.

Specifically, this centres around situations where an employee is paid mileage at less than the Approved Mileage Allowance payment rate and is also paid a car allowance.

Two companies argued against the complexities of mileage and car allowance payments and won back a combined £3.6 million.

Background

Typically, employees are paid a car allowance, which is treated as another form of salary (taxable and liable to NICs) to enable them to purchase or lease a vehicle privately. 

This is either customary for their role or because they will be required to carry out business travel, but the employer does not wish to manage a fleet of company vehicles. This is especially beneficial for leased, higher value, high CO2 emitting vehicles which would have a high company car benefit in kind.

Approved Mileage Rates

The Approved Mileage Allowance Payment (AMAP) is currently at the rate of 45p for the first 10,000 miles and 25p thereafter. The 45p rate relates not just to a fuel element for the travel but also to the wear and tear of the vehicle. Advisory fuel rates alone are currently in the region of 12p – 23p per mile, so the balance is for the wear and tear element. But many employers believe they have already paid the car allowance, so it would be double counting to also pay the full 45p mileage rate.

Tax and National Insurance

In this instance, the employee is able to claim additional tax relief either via the PAYE system or via self-assessment for the difference between what they were reimbursed and the full AMAP rate.

But initially, they would pay Employers and Employees National insurance on the car allowance, but no National Insurance or tax on the fuel reclaim.

The tax case

However, in Laing O’Rouke Services & Willmot Dixon Holdings Limited vs HMRC, both of these companies successfully argued that the difference between the mileage allowance paid and the AMAP rate was not liable to NIC – and as a result, they were entitled to a refund. Laing O’Rouke claimed a refund of £2.2m, and Willmott Dixon a NIC refund of £1.4m.

Example

If an employee who receives a car allowance of £200 per month travels 3,000 miles in their own car and the employer reimburses them at 30p per mile instead of the AMAP value of 45p for the first 10,000 miles, then:

  • AMAP reimbursement is 3,000 @ 45p = £1,350
  • Employer reimbursement is 3,000 @ 30p = £900.

The employee is entitled to tax relief on the difference (£450 in this case). The amount HMRC approves for reimbursement without an income tax consideration is 45p. So, if the employer reimburses less than this, HMRC will give income tax relief for the difference.

The employer would also be able to claim a refund of Employer NIC of £450 x 14.53% (using 2022/23 rates) = £65.38

Employee NIC can also be reclaimed at £450 x 13.25% = £59.62.

Will HMRC Appeal?

There is the option for HMRC to challenge this ruling in the Court of Appeal. The other route available to HMRC will be to alter the legislation, but this would not have an impact on earlier year’s claims.

Action for employers

Despite HMRC’s guidance saying otherwise, there is a legislative provision saying employees (and employers) are entitled to NICs relief. If they are entitled but are not getting it, the employee has suffered an unauthorised deduction from wages.  Strictly, employees could take their employers to tribunal for unlawful deductions from their salaries ( I.E. excessive NIC being paid to HMRC). 

Employers should consider submitting a protective claim for up to the previous 6 years to HMRC. The employer must be able to support their claim with prior year mileage records, and whilst it might be a couple of years until this is finally repaid, waiting until claims are being repaid for others will result in at least a couple of years falling out of time to be reclaimed.

Please do not hesitate to contact Beatons for advice info@beatons.co.uk or call 01473 659777.