Are you an employer who pays car allowances to employees who use their vehicles for business purposes? If so, you might be eligible for a refund for your national insurance contributions (NICs).

A recent Upper Tribunal decision has shed new light on the definition of "relevant motoring expenditure" (RME), potentially saving businesses thousands of pounds in overpaid NICs.

The nuts and bolts of mileage allowances

Before we discuss the tribunal decision in detail, let's examine how mileage allowances work for tax purposes. When an employee uses their car for work, employers can pay them a tax-free mileage allowance up to an approved amount. This approved amount is calculated by multiplying the business mileage for the year by the approved rate, which is currently set at 45p per mile for the first 10,000 business miles in the tax year and 25p per mile for any subsequent business miles.

While similar rules apply to National Insurance, there are some differences. Amounts classified as RME are disregarded from the computation of earnings for National Insurance purposes as long as they do not exceed the qualifying amount. The qualifying amount is calculated by multiplying the business miles in the earnings period by the approved rate, which for cars and vans is 45p per mile regardless of the number of business miles in the tax year.

The tribunal's verdict

In a recent decision, the Upper Tribunal found that the definition of RME was broader than the one previously applied by HMRC. The tribunal ruled that RME not only applies to payments for the actual use of the car but also to payments related to the potential and anticipated use of the employee's car for business purposes.

This means that car allowances paid to employees should have been disregarded for National Insurance purposes up to the qualifying amount, as they count as RME. Consequently, some employers may have overpaid National Insurance contributions based on the narrower definition previously used by HMRC.

Calculating your potential refund

To illustrate how this decision could affect your business, let's consider an example. Suppose you pay an employee a monthly car allowance of £300, and in one month, the employee undertakes 500 business miles. The qualifying amount for this period would be £225 (500 miles x 45p per mile). Under the tribunal's ruling, £225 of the allowance should be disregarded for National Insurance purposes. However, under the previous definition applied by HMRC, the entire car allowance would have been treated as earnings subject to NICs.

Claiming your refund

If you have overpaid National Insurance contributions based on the wider definition of RME, you may be able to correct the position via Real Time Information (RTI). To do so, you'll need to substantiate your claims on a pay-by-pay period basis and provide HMRC with the following evidence:

  • A list of employees included in the claim, along with their National Insurance numbers
  • Evidence of the business mileage undertaken by each employee
  • The amount of car allowance payments received by these employees
  • Details of any other RME payments received by the employees (e.g., mileage payments)
  • The primary and secondary Class 1 National Insurance contributions being reclaimed

If an overpayment cannot be corrected through RTI, you can make a written claim to HMRC using the reference Relevant Motoring Expenditure. Your claim must include the details listed above and an explanation of why a correction cannot be made through RTI.

Shifting gears

The Upper Tribunal's decision has the potential to save businesses a significant amount of money on their National Insurance contributions. By widening the definition of RME to include car allowances, employers who have been paying NICs on these allowances may now be eligible for a refund.

If your business pays car allowances to employees who use their vehicles for work, it's worth reviewing your records to determine if you're entitled to a refund. The process of claiming a refund may seem daunting, but with the right evidence and a clear understanding of the tribunal's decision, you could be well on your way to putting more money back into your business.

In conclusion, the Upper Tribunal's decision on RME is a welcome development for businesses that have been paying car allowances to their employees. By taking advantage of this ruling and claiming a refund on overpaid NICs, you can ensure that your business is not only compliant with the latest regulations but also operating as efficiently as possible. So, rev up your engines and start exploring whether you're due a refund today!