Employment eBulletin October 2010

Opportunity to reclaim National Insurance Contributions

HMRC recently lost a Tax Tribunal case (Total People Ltd v HMRC [2010]) in relation to lump sum mileage payments.

The company paid mileage allowances in two ways: first, a straightforward mileage allowance payable at a rate per mile; or, second, a lower mileage allowance of 12p per mile plus an annual lump sum payable in monthly instalments.

The company initially treated the lump sum payments as earnings and subject to Class 1 National Insurance Contributions (NIC) but, after taking advice, claimed a refund of NIC on the basis that the payments were in fact reimbursements of motoring expenditure.

The Tribunal agreed with the company.

Therefore, you may have an opportunity to reclaim overpaid NIC on lump sum payments made in the last 6 years and/or change your systems going forward to minimise your NIC costs.

A potential NIC refund could be due to you as an employer and to your employees if:

• you paid lump sum payments (subject to tax and NIC) to employees when they used their own car for business journeys;

• you reimbursed business mileage at a rate less than HMRC Approved Mileage Allowance Payments (currently 40p for the first 10,000 miles, then 25p thereafter);

• there was no direct link between the lump sum payment and salary and it did not increase with normal pay rises;

• you have retained records or have supporting evidence to verify business mileage.

Example

You paid £250 per month lump sum payment to an employee and reimbursed business mileage at 18p per mile. The employee travelled 8,000 business miles in the year. The 18p rate should have been paid to the employee free of tax or NIC but you may have paid the £250 allowance subject to tax and NIC.

The employee has always been entitled to claim the tax back on the HMRC allowance of 40p less 18p paid.

Following the Tax Tribunal case you could claim a refund of the employers' NIC 8,000 miles x 22p (the difference from 40p) x 12.8% (NIC rate) = £225.

A claim can go back up to 6 years and if you paid the above rates to 50 employees the claim could be worth £68,000.

Employees could also qualify for a repayment of their employee’s NIC which could be £1,160 per employee for a 6 year claim in the above example.

The higher the business mileage levels the higher the potential NIC reclaims to the company and employees.

Next steps...

HMRC has sought permission from the Tribunal to appeal this case to the Upper Tribunal. If permission to appeal is granted then the above decision may be challenged. Clearly, there is the risk that the ability/scope to make claims may be curtailed - possibly imminently.

Therefore, we would advise employers with a potential claim to register this with HMRC to maximise the chance of a successful NIC reclaim in the future.

Contact us as soon as possible to discuss this opportunity further.