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Car Allowances: Earnings or Expenses?

It's not often that the taxpayer wins a famous victory but as this article goes to press, it looks like he has.

The case was Total People Ltd vs HMRC. For those who like the detail, the case citation is [2010] UKFTT 379 (TC) and is from the new First Tier Tax Tribunal. The case concerned a contention that payments to employees as a "car allowance" were motoring expenses and not earnings. To the ordinary man or woman in the street, there doesn't seem to be much difference but to the tax geek, there is a world of difference.

The main difference is that relevant motoring expenses do not attract a charge to employers national insurance whereas earnings do. Is this just another tax case that affects one or two people, and is it such a special situation that few businesses can get any advantage from it?

Absolutely not.

 

 

Let's take a simple example.

Suppose an employer pays his 5 employees a car allowance of £300 per month because they must use a suitable car for their employment (and not an old banger). The annual costs are as follows:

5 employees @ £3600 per year = £18,000

Employers National Insurance at 12.8% amounts to £2304

So if you were able to recover the tax, say for 6 years, that would be worth having.

While it is a simple calculation, you'll need some data to calculate whether or not it is worth making the claim. The rules can be found at Regulation 22A of the Social Security (Contributions) Regulations 2001 as amended by the Social Security (Contributions) (Amendment No 2) Regulations 2002.

The data you'll need are:

  • Mileage rates actually paid to employees
  • Number of business miles travelled
  • Amount of car allowances paid.

HMRC may - as is becoming usual when they lose - simply change the rules so teh key is to act now or you might lose the chance to get some money back.

You can read the whole decision of Total People Ltd vs HMRC

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