Introduction »

Boxing with National Insurance

A recent case concerning the structure of a motor expense policy demonstrates the importance of understanding how the tax and National Insurance (NI) law is constructed when considering alternative expense and other remuneration strategies.

Cheshire Employer and Skills Development Limited (formerly Total People Limited) was engaged in the provision and placement of apprentices and other trainees with employers and the supervision of their training. The company employed training advisers who were required to visit the employers and the trainees at their place of work.

Motor expenses were paid to the employees as necessary but most of them were paid to the training advisors.

The staff handbook provided two options for the payment of travel expenses:

• a cash entitlement of 12p per mile plus a lump sum or
• mileage expenses of 40p per mile (the statutory rate at the time).

However, in practice, the staff likely to perform extensive business travel, were not given the option to elect for the 40p rate. The lump sum entitlement was the only option for employees travelling at least 2,500 miles per annum. The level of the lump sum was set according to salary and was paid by monthly instalments and the contracts of employment did not show the lump sum as part of salary. Increases in the lump sum payment were not linked to increases in salaries and were at a much lower level and occurred less frequently.

The company claimed a refund of NI which it considered it had wrongly paid in respect of the lump sum payments. HMRC refused to make the repayment.

Round 1 to the taxpayer

At the First Tier Tribunal (FTT) the company argued that the payments were not earnings but were relevant motoring expenditure and therefore exempt from NI. The Tribunal agreed with the company as there was no link between any increase in salary and the increase in motoring expenses. HMRC had argued on the basis that there was a contractual entitlement to the lump sum, the amount paid differed depending on the grade of the employee rather than the grade of the car and that there was no correlation between the amount paid and the distance travelled. HMRC then appealed.

Round 2 to HMRC

The Upper Tier Tribunal (UTT) established that there was no link between the payment and the use of the vehicle and agreed with HMRC that the payments were not relevant motoring expenditure and were emoluments of employment liable for NI.

And the final decision…

The company appealed to the Court of Appeal on the basis that the FTT had not made an error of law in reaching its conclusion on the earnings point. If it had not made an error of law, then the UTT had no jurisdiction in overturning the decision. The Court of Appeal decided that the FTT had not made such an error and the company’s appeal was allowed.

If you have any concerns regarding any aspects of your remuneration and expense policies please contact us for further advice.

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