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Key points
- The appeal concerned whether the car allowance constituted earnings.
- Relevance of descriptive headings in the legislation.
- Regulation 22A is a charging provision whose scope by definition must be wide.
- Relevant motoring expenditure (RME) covers variable and fixed costs, including depreciation.
- HMRC claimed there had to be a link between business use and the car allowance.
In ‘Wheels go round – part 1’ (Taxation, 15 July 2021, page 12), we looked at the law relating to approved mileage allowance payments (AMAPS) whereby staff driving their own cars on business can claim tax relief for up to 45 pence per mile (25p after 10,000 miles.)
We also looked at the equivalent National Insurance disregards in Social Security (Contributions) Regulations SI 2001/1004, Schedule 3 Part VIII para 7A and in particular reg 22A which defines relevant motoring expenditure (RME) and the qualifying amount (QA). The latter is M x R where M is number of business miles driven and R is the rate, which is a flat 45p, irrespective of number of miles.
In 2012 the Court of Appeal in Cheshire Employer and Skills Development Ltd v CRC (CESDL) [2013] STC 2121 upheld the earlier Total People Ltd (TC661) decision that drivers using their own cars for work who had been reimbursed business mileage at less than the AMAPS rate were effectively entitled to National Insurance relief up to the AMAPS rate on their business mileage as well as income tax relief through AMAPS.
For more than ten years, the UK tax world waited for another test case. The first of a number of these, Laing O’Rourke Services Ltd (LOR) (TC8161) (tinyurl.com/c9nyvhdy), was heard in February 2021 via video conference. The judge’s verdict was released in early June. The taxpayer lost the case.
Background
Laing O’Rourke Services Ltd gave some of its staff a company car, plus a business mileage reimbursement at the advisory fuel rate, eg 10p a mile, as had many other UK companies. It gave other staff a monthly cash car allowance plus a similar business mileage reimbursement rate, as had CESDL.
The drivers using their own cars on business could, and probably did for the most part, claim tax relief per business mile on the difference between the 45p AMAPS and the mileage rate actually reimbursed by LOR. The company, however, accounted for National Insurance in full on the car allowance payments it had made to staff which also covered business usage.
When a taxpayer believes they have overpaid National Insurance contributions or made a mistake they can submit a claim under SI 2001/1004, reg 52 and, as relevant, reg 55, for the reimbursement of contributions paid in error for that tax year and any other tax year ending in the previous six years from the date of the claim. In 2010, LOR submitted a claim going back to 2004/05. HMRC refused to refund any National Insurance. Correspondence ensued for ten years and, eventually, the case was heard in the First-tier Tribunal in February 2021.
LOR was joined with another taxpayer under First-tier Tribunal Court Procedure Rule 18 as effectively a lead case. The principle developed in the correspondence with the courts is that the result should also guide how HMRC deals with other taxpayers that have submitted, or could submit, similar claims. However being a First-tier Tribunal decision it is not generally binding on other taxpayers.
First question
The first question the judge addressed was are the payments (of the car allowance) ‘earnings’ under general law? In CESDL the car allowance was held to be not earnings.
LOR had a scheme very similar to that used by CESDL. Similarities included that the allowance was called a car allowance (though CESDL also called it a ‘cash entitlement’).
Both companies did not raise their allowances for many of the years in question, though CESDL reviewed its allowance annually and, on a few occasions, increased the allowance – but not in line with wage increases. It is inconceivable that LOR did not also review its allowances on a regular basis because such a company would almost certainly have reviewed all its expenses policies regularly, but given the passage of time and more importantly churn of personnel it was unable to provide adequate evidence of this in the eyes of the judge.
Both companies had differing car allowance rates for different grades, though in the case of CESDL it was only two grades, in LOR it was several more.
Both cash allowances had been calculated based on anticipated or expected total annual mileage and total business versus private mileage. In the case of CESDL it was 15,000 total annual miles and for LOR it was 25,000 total miles. The levels of allowances were not hugely dissimilar.
In CESDL the policy was contained in the company’s expenses manual and the round sum was expressed to be in lieu of the 40p AMAPS, which would have been free of National Insurance. By contrast LOR included the information within its car policy and the allowance was expressed as in lieu of a company car, which would also have been National Insurance free for the employee, but subject to class 1A in the hands of the employer. It is worth noting that the main claim in the LOR case was made by and on behalf of the employer.
HMRC’s main argument was that many drivers in the LOR scheme had no recorded business mileage: in some years up to 30% of the total scheme members. However it is important to note that under the LOR policy, drivers cannot claim the first 12 miles of any business journey, so it is plausible that some or all of them did drive up to 12 business miles every day but simply did not record or claim them. Further, it does not follow that because someone did no business miles one tax year that they did not do significant business miles the tax year before or after. This 30% figure thus needs to be treated with some caution.
LOR also said in its documentation that ‘the payment is taxable and NICable’. HMRC made great play of this, but just because a human resource person at some point says something that does not make it so in tax law.
HMRC criticised LOR because its only witness of fact was not involved in the car allowance scheme design and knew little about its history. As it happened this was the only ‘relevant employee’ who had been there throughout the claim period (and is still there) but all of HMRC’s questions related to what happened before he joined LOR or before he took over responsibility for the car allowance policy.
In other words, the whole focus of the HMRC cross examination was on what the employee did not know rather than what he did know. It is worth stressing that the scheme was inherited when another business was bought in about 2001.
The tribunal criticised LOR for not having all the relevant historic documents it needed for the trial. We act for many companies with similar RME claims – indeed 250 large employers submitted protective claims – but when those claims were made very few, if any, of these companies started to pull together a First-tier Tribunal case file: no company would or could have anticipated that it would become a test case 11 years later.
LOR could perhaps have brought someone out of retirement to be a witness but, without knowing who the original scheme designer was over 20 years ago or even if they are still alive, that would be difficult and I think the criticism of LOR is unfair.
All of that said, the burden of proof is on the taxpayer and, on balance, there was probably not enough evidence on the day of the hearing of the relationship between the anticipated or actual business expenditure and the quantum of car allowance to lead the tribunal to any conclusion other than that the payment was general earnings.
There may, though, have been confusion, by all parties, as to whether they were looking at earnings for income tax purposes or National Insurance purposes: the definitions are completely different. Even if something was earnings for income tax purposes it does not follow that it was also earnings for National Insurance purposes. We covered this point in the first article.
The key point is that it would not have been a problem for HMRC had the car allowance been deemed not to be earnings. This is because it had been taxed already so there was no loss of tax as under reg 22 and reg 22A the whole car allowance (with the exception of the QA) is brought back into earnings. So if someone does no business mileage those regulations deem the whole car allowance payment to be earnings for National Insurance in full. If someone does some business mileage then M x R is disregarded for National Insurance purposes, just as it is relieved under AMAPS for income tax purposes.
Second question
What does Schedule 3 Part VIII para 7A mean?
Part VIII lists items which are not earnings for National Insurance purposes. Para 7A(1) states:
‘To the extent that it would otherwise be earnings, the qualifying amount calculated in accordance with regulation 22A(4).’
Regulation 22A(4) is the formula M x R mentioned earlier. As a reminder M is the number of business miles driven and R is the rate, which is a flat 45p, irrespective of number of miles.
This can be very easily translated to say in layman’s terms and in the context of Schedule 3: ‘You shall disregard M x R from earnings.’
There is no requirement for the thing being disregarded to be an RME: thus it is not necessary to even consider what an RME is. Secondly, there is no requirement for the ‘thing’ being disregarded to be a QA. The only requirement is to take the formula in reg 22A(4), ie M x R and disregard that amount.
In our view there can be no ambiguity as to the meaning of para 7A. However HMRC disagreed and sought to justify its view by citing the heading of the regulation ‘Qualifying amounts of relevant motoring expenditure’. The tribunal had therefore to consider whether headings in secondary legislation could be used as an aid to construction. HMRC’s argument referred to R v Montila and others, a case about drugs and the proceeds of crime, in which the House of Lords determined that it was permissible to use a heading to determine the meaning of legislation (tinyurl.com/dvn46mpd). That was perhaps understandable in the context of the need to bring criminals to justice. Here, in a relieving provision in a very different context, there seems to be no urgency or need to look at all at any heading.
Reference was also made in the judgment to para 7A(2) and para 7B, which do make explicit reference to the heading within the body of the actual legislation.
But by contrast para 7A(1) does not make this type of explicit reference. That surely is deliberate since the draftsman would have had ample opportunity to amend para 7A(1) when para 7A(2) or 7(B) were introduced or indeed at any point over the past 20 years and did not do so. The only alternative is that the draftsman was content they did not need to do anything, because the RME definition is so broad and far reaching that everything and anything in any way connected, no matter how loosely, to usage of a car would qualify for the relief in any event.
On the basis that there is ambiguity or difference of opinion (albeit we believe HMRC is in a minority of one here) and the fact that the style of the draftsman was generally to set out descriptive headers throughout the rest of that schedule, one can initially see why the judge reached her conclusion.
However para 7A was inserted by SI 2002/307, so most likely was written by a different draftsperson from the rest of Schedule 3. If that is the case the main justification for reaching a decision on the meaning of para 7A falls away and therefore the conclusion is potentially wrong.
If we look at the explanatory notes which were issued at the time that para 7A was introduced we find that they state:
‘Regulation 7 amends Part VIII of Schedule 3 to the principal regulations. It inserts new paragraphs 7A to 7D into that Part. The purpose of these new paragraphs is to reflect, so far as is practicable, the treatment of such payments for tax purposes .’
The judge even says that a purposive approach should be taken and if we look at the explanatory notes and entire history of the insertion of Schedule 3 it is surely to mirror as closely as possible for National Insurance the reliefs that exist for income tax purposes.
I agree with the judge when she says the legislation is ‘riddled’ with differences between tax and National Insurance. Maybe more focus could have been placed on analysing the National Insurance regs rather than confusing them with the income tax rules. That said, however, every time there is a tax change, the accompanying National Insurance change is not that far behind. The thrust of successive governments has been to align tax and National Insurance and, with relatively few differences, they are to all intent and purpose aligned, except that for National Insurance there is an additional employer cost/charge that we do not find with income tax.
In CESDL, Lord Justice Mummery started by asking Giles Goodfellow acting for the taxpayer: ‘Please don’t bore me with the technicalities but just start by explaining to me what is going on economically.’
Lord Justice Etherton added: ‘So Mr Goodfellow what you are saying to us is that these drivers were entitled to tax relief and you are saying it is only right and proper that they also obtain the same or similar National Insurance relief for their business motoring spend?’
In other words the Court of Appeal judges took a holistic big picture view of the economics and substance of the situation, as well as then later looking at the law and concluding that it supported their big-picture judgment.
Here, in my view, HMRC has completely ignored the substance, ethics, morals, economic situation, spirit of the law and danced on pinheads to try to deny National Insurance relief even though it had already given income tax relief for M x R.
There is also nothing in the judgment to suggest there was any disagreement between the taxpayer and HMRC over the QA – only whether it applied in these circumstances.
On a positive note, I agree with the judge who said the ‘it’ referred to in para 7A – to the extent that it would otherwise be earnings, the qualifying amount calculated in accordance with regulation 22A(4) – is to the QA itself. This meant that to the extent that the number of business miles x 45p per mile is included within earnings, the same figure of business miles x 45p is then to be unincluded, ie disregarded. ‘It’ could, however, equally be referring to the entire earnings of the employee. Assuming the judge is right there should be no limitation of the disregard by reference to RMEs and it should be against all earnings.
Final and most important question
This concerned reg 22A(3). LOR had (at least) three doors through which to go to succeed in its appeal and any one door would have sufficed. It failed in getting through the first two doors but if it could succeed with door three, it would be home and dry. That door could potentially have been unlocked by detailed analysis of reg 22A(3).
This was the most important test of all, and yet relatively little time was devoted to it in argument and only six lines are dedicated to the regulation – near the end of a 32 page judgment.
Regulation 22A was set out in our first article, but to recap RME includes ‘any other form of payment, except a payment in kind, made by or on behalf of the employer, and made to, or for the benefit of, the employee in respect of the use by the employee of a qualifying vehicle’.
This is a charging provision and its net is by definition cast wide to catch as many fish as possible which might otherwise escape the jaws of ‘general earnings’.
Note the words used are ‘in respect of the use’, rather than ‘for the use’. ‘For the use’ could have a narrow meaning but ‘in respect of’ goes far wider. In my view any association or connection with usage, be it anticipated usage or simply availability for usage, falls within the definition of RME. Indeed the heading in reg 22A is ‘Amounts to be treated as earnings in connection with the use of qualifying vehicles other than cycles’. Here ‘in connection with’ is potentially even wider and looser than ‘in respect of’.
HMRC’s counsel was, in our view, completely wrong to say: ‘As reg 22A imposes a charge it is understandable and likely that its focus is narrowed.’ This cannot be true otherwise we see the sort of avoidance set out in part one of this article.
HMRC’s counsel was also wrong, in our opinion, to say or suggest that RMEs are a subset of MEs. The opposite is true. Because reg 22A is a charging provision and the draftsman wanted it to bite lest someone came up with an ingenious way to escape National Insurance altogether, it was not enough that something was just a motoring expense – to be caught it could be a relevant motoring expense. If we picture motoring expenses comprising a galaxy then a relevant motoring expense is the entire universe within which the galaxy sits. The draftsman wanted nothing to escape or fall outside the charging net.
The judge even asked counsel for the taxpayer ‘is there anything which is an irrelevant motoring expense?’ to which counsel correctly answered ‘no’. By definition all motoring expenses are relevant and expenses which are not to do with actual motoring, such as parking, can still be caught as RMEs. That is to say, paying to leave a car somewhere so it is not used is still a payment in respect of the use of the car. The car had to be driven to the car park and so the payment is in respect of the usage. The same principle would apply to paying for car washing and cleaning etc.
Is depreciation an RME? We say yes!
Within businesses there are fixed and variable costs. In a car factory the variable costs are the components used in the cars and the salaries of the workers on the production line to build the cars. But there are also the fixed costs of the factory – the management or head office overheads. There are all the rental costs of the building – insurance, heat and light, water standing charges, etc. All of these have to be paid whether one car is produced or 2,000.
Similarly principles apply to an employee running their own car. The more the employee uses it the more fuel they will consume. This is the most variable element. But also the more they drive that car whether for business or privately the more it will depreciate. It is a well-known adage in motoring circles that for every 5,000 total miles driven by a car, that car will depreciate a further 6%, or the PCP rate will be 6% higher.
What about insurance? To add business cover is an extra expense, but insurers also ask about the total expected mileage, because the more miles driven, the higher the risk of a collision or loss and so the higher the premium. Similarly, the costs of tyres, windscreens, servicing and parts will be higher. Even MOT and road tax are associated with use. If the car were off the road and the owner had a SORN they would not need to incur that expenditure, but just to drive a few yards on to the highway means they have to incur those costs.
Everything other than fuel could be deemed a fixed cost, but it is still part of the overall cost of running that car and having it available for use. Every one of those fixed costs is in some way linked to, or connected with, or in respect of usage and is therefore also variable.
With that in mind let’s look at reg 22A(3). It says:
‘A payment is relevant motoring expenditure if –
a) it is a mileage allowance payment within the meaning of [ITEPA 2003, s 229(2)];
b) it would be such a payment but for the fact that it is paid to another for the benefit of the employee; or
c) it is any other form of payment, except a payment in kind, made by or on behalf of the employer, and made to, or for the benefit of, the employee in respect of the use by the employee of a qualifying vehicle.’
Fuel would be within reg (3)(a) and any other costs, fixed or otherwise would be within reg (3)(c). RMEs therefore cover variable and fixed costs, including depreciation.
In addressing reg 22A(3)(c) the judge underlined the words ‘in respect of …’ By contrast I would have underlined the words ‘any form of payment’.
The crux and kernel of the case is therefore:
- In the minds of LOR, for the period in question, what was the payment for?
- In the view of the individual car allowance recipients, albeit none were called as witnesses, what was the payment for?
- Did the payment cover ‘any form of payment that covered all the usage and running costs described above’, namely depreciation, insurance, wear and tear, servicing, MOT, tyres and breakdown assistance?
As a matter of fact it was LOR’s intention, per their witness, that the car allowance should cover all those costs and there was no legal or moral duty for it to carry out any exercise to get it right to the nearest penny for every driver. The majority of LOR drivers did secure their own personal cars to use on business as well as private journeys, so no doubt staff viewed the car allowance as a contribution from LOR towards the running costs and use of their own car.
The monthly lumps sum was clearly a payment by LOR to cover all of those costs, since otherwise the company would have had to incur those costs by providing a company car instead.
HMRC’s counter argument
The entire HMRC counter argument was founded on the Upper Tribunal decision of Judge Bishopp in CESDL. This had to be substantially re-written after the first draft was sent to the instructing agents and re-written again some six months after it was released due to uproar from the wider accounting and tax community – see my article ‘Total disaster’ (Taxation, 13 September 2011, page 10).
Counsel for the taxpayer described that decision as ‘Bishopp having a bad day at the office’, which the judge appeared to find amusing, from which we presume she had empathy with that view.
HMRC says that for any other form of payment to be for the use of a private car there has to be a linear relationship between business usage and the amount of the allowance. This is flawed because:
- Use in the context of reg 22A(3) means any use and HMRC has openly admitted that it can include private usage, for example a driver who has no business usage but has 25,000 miles of private usage uses that car more than someone who does zero private and 15,000 business miles.
- There is no requirement or hint or presumption or inference whatsoever in the legislation that any linkage has to be drawn.
- Assuming there was a requirement and, for the sake of argument, that HMRC is right that there has to be linkage, it is necessary to look every month at the total usage – not just business, and then flex the allowance up or down every month by driver to satisfy HMRC’s made up criteria:
- this is an impossible task in practice – it is unnecessary and is totally disproportionate; and
- I am not sure it is even legal to ask the employee for such information. To avoid mistakes, a proper exercise would be required to ask every driver to document every private journey. Such a request is not only unreasonable and unenforceable but probably not even legal considering GDPR, Human Rights Act and other privacy laws.
Such an impossible test does make para 7A and reg 22A otiose as counsel for the taxpayer suggested.
Smokescreen
Yet the judgment did favour this approach. Why? Within the judgment there are 146 references to the word business and at least 22 instances where it looks at just business usage. But this is wrong particularly when looking at the RME question. One has to look at total usage, so it matters not if a driver does no business mileage. If he does 25,000 private miles he still uses that vehicle more than someone else doing just 15,000 business, so it is even more of an RME for the person with no business mileage as it is for his colleague who does 15,000 business miles.
HMRC successfully created a smokescreen in which the legislation and purpose of the legislation was lost and the test for earnings and the different test for RMEs were interchanged and overlapped.
There was probably also confusion as to whether at any particular point it was income tax or National Insurance definitions being considered – they are different, and some of the parties were clearly wearing income tax glasses rather than National Insurance glasses when looking at the law and the facts.
Finally, even if we assume that the legislation did intend to say business rather than total usage there are simple rebuttals.
First National Insurance is a personal liability. It is individual and peculiar to that employee and to that earnings period. So it is possible to have two similar employees doing the same role with the same car allowance but if one is a foreign national and the other a UK citizen the National Insurance liability will be different.
Similar issues arise if one of those individuals is over retirement age (or indeed under 18), or where they may both be British and the same age. They will not pay the same National Insurance on the car allowance as their earnings may be different and within different thresholds, or not pay any National Insurance at all.
Similarly, if some employees do not receive a car allowance or have not done any business mileage and so do not put in an RME claim or have not had a s 8 determination, they are not appealing anything and they are not the responsibility of the court. They should not even have been considered in the arguments or judgment.
The only people who matter here are the 500 or so staff who did carry out business mileage. Therefore one should only look at each of those drivers and ask if they personally received an RME payment.
Indeed going further, a sample of 17 drivers was agreed between HMRC and LOR. The individuals involved were the ‘test employees’ for this case, so only their contracts, arrangements, driving habits and car running costs should have been considered. They were the ones appealing their s 8 notices and yet they appeared not to have even been mentioned or discussed. They certainly do not feature in the judgment, yet it was equally their appeal that was being heard.
It is a moot point anyway because the legislation does not limit RMEs to those who do business journeys and it is for that reason that I believe HMRC pulled off a great finesse – when the appellant held all the trump cards – by confusing the court on the difference between business use and total use, in the context of what is an RME and what is earnings: the tests and criteria are completely different.
This point in short
LOR argued that the car allowance was a payment in respect of the use of the personal car. HMRC argued that it was a lump sum given for giving up the company car, or simply linked to grade without any requirement to use that vehicle on business.
The judge said (at para 223): ‘The payments were not only not made in respect of business use; they were not made in respect of use at all given that they were entirely determined by reference to the grade of the employee regardless of the extent of the use of the car.’
This conclusion is flawed for many reasons. How one sets the amount, and what the amount is for – or rather in respect of – are two different and mutually exclusive questions.
First, without being too glib one could set the allowance by reference to the employee’s age, house number or inside leg measurement – but it can still be a payment to expend on a personal car, however used. It is a payment in respect of the use of the car.
Second, to start the sentence (at para 223 above) just by looking at business mileage is to confuse the RME question with the first question ‘Is it earnings’ for income tax purposes. We know and have proved that a payment can be entirely for personal use and still be an RME.
Third, there is no requirement in reg 22A to link anything to anything. One can randomly give two identical drivers £1 a month and £1,000 a month respectively to spend on using their own vehicles and both are still RMEs.
Fourth, a payment can be multipurpose. A company can give a bonus to recognise the employee contribution, it can be partly based on profit share and can also be a payment made to facilitate retention. Similarly a car allowance can be for giving up a company car (not that we agree that is what it was in this case), it can be for using a car, it can be as a contribution to business travel costs, or it can be a payment for the combination of any and all of the above. Unlike many other instances of legislation there is no requirement here to have any ‘primary purpose’ or ‘main purpose’. A payment can be for any or all of the above and that does not stop it also being any form of payment in respect of the use of a qualifying vehicle.
Fifth, throughout the LOR policy documentation there were repeated references about the need to have business use insurance on one’s own car and the conditions and criteria around age and condition of the car. The 2012 policy version for example states:
‘2.11 (b) Employees in receipt of a car allowance and who are required to undertake business mileage must ensure that they have a reliable and roadworthy vehicle available AT ALL TIMES .’
The words in caps and in bold appear as such in their policy. In the tribunal, counsel for HMRC suggested that employees could simply borrow a car from a family member – which is in complete contradiction to the above official policy of LOR.
Sixth, at no point did LOR hold out or imply that the car allowance was for anything other than use of a personal car. And I repeat – how the figure was calculated is not relevant to the ‘purpose’ of the payment. That said LOR did take a broad brush approach – which in the context of the business was the only sensible, logical and proportionate thing to do. HMRC by contrast implied that it was too broad brush. How something can be too broad brush defeats me.
Finally if we look at HMRC’s National Insurance Manual para NI5827, HMRC acknowledges that road fund licence, insurance, servicing, repairs, replacement tyres are all RMEs. It is wrong to suggest that depreciation is not also an RME as we demonstrated above. If all the individual parts that make up the car allowance are RMEs then how can the sum of the whole not also be an RME? The purpose of the car allowance was to cover all those RME related costs.
One can only hope that LOR decides to appeal the decision and that we may obtain a different view from a higher court.
