Laing O'Rourke Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 June 2021 |
| Neutral Citation | [2021] UKFTT 211 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 211 (TC)
Judge Tracey Bowler
Mr Jolyon Maugham QC and Ms Georgia Hicks, instructed by Deloitte LLP appeared for the appellant.
Mr Akash Nawbatt QC and Mr Joshua Carey, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents.
NICs – Whether payments to employees who chose a cash allowance instead of a company car on the basis that they would use a non-company car meeting stated requirements for business use were earnings – Yes – Application of Pook (HMIT) v Owen (1969) 45 TC 571 and Donnelly (HMIT) v Williamson [1982] BTC 11 – Is the disregard of qualifying amounts limited to payments of relevant motoring expenditure – Yes – Were the payments relevant motoring expenditure – No – Appeal dismissed.
The FTT dismissed the company's appeal against HMRC's ruling that cash allowances paid to employees as an alternative to a company car were not “relevant motoring expenditure” and were therefore subject to Class 1 NICs.
This case followed protective claims for reimbursement of NICs made by the company following the decision in R & C Commrs v Cheshire Employer and Skills Development Ltd (formerly Total People Ltd) [2011] BTC 1,832, and is also the lead case for another pending appeal. The dispute covers the years from 2004–5 to 2017–18.
For some grades of employee, Laing O'Rourke Services Ltd (LOR) offered a fixed cash allowance as an alternative to the provision of a company car. The allowance was subject to a number of conditions which varied slightly over the life of the scheme but typically the employees were required to have their own vehicle commensurate with the company car offered and to maintain it to certain standards, to have insurance covering business travel and additional roadside breakdown cover, and provide evidence of a valid driving license.
The company argued that the cash allowances were not earnings for the purposes of NICs, or alternatively that if they were, then they represented a “Qualifying Amount” within the meaning of regulation 22A of the Social Security (Contributions) Regulations 2001 and paragraph 7A, Part VIII of Schedule 3 to those regulations and were thus not subject to NICs.
HMRC contended that the payments were earnings. In addition, a disregard for a “Qualifying Amount” can only apply in respect of “Relevant Motoring Expenditure” (RME) as defined in regulation 22A, and as the cash allowances did not meet this definition, they were not RME and therefore Class 1 NICs must be applied.
Earnings for the purposes of NICs are defined in the Social Security (Contributions and Benefits) Act 1992, s. 3 as being “profit or remuneration derived from employment” and it is well established that payments which are purely reimbursement of expenses are therefore not payments of earnings (Pook (HMIT) v Owen (1969) 45 TC 571.
The FTT found that the cash allowances in this case were earnings in the first instance. Eligibility for the scheme was largely determined by grade seniority and did not necessarily depend upon the need to use a vehicle for business travel. The company's own analysis showed that in 10 out of the 14 relevant years, 50% or more of the employees drove no business miles. HMRC also carried out analysis over 9 years and found that on average over one third of the scheme participants drove no business miles.
The company said that it would have been administratively unworkable to adjust the scheme payments to take account of business mileage, but the FTT rejected that argument and held that, even applying the relaxed approach suggested in Donnelly (HMIT) v Williamson [1982] BTC 11, there was insufficient evidence to support that any genuine “broad brush” approach to the estimation of business costs had been undertaken. Aside from the obvious issue that a significant proportion of participants did not have any business travel at all, there was no real evidence about the design of the scheme or the way on which the allowances had been calculated when the scheme was set up. The scheme had not been reviewed from 2001 (when it was first inherited from a predecessor company) until 2016, and even in that and the subsequent 2017 and 2019 reviews, there was no clear attempt to quantify business expenditure. Rather, the 2019 review had sought to bring the payments into line with those made by other organisations.
Having established that the payments were earnings, the FTT then considered whether a disregard could be applied to those earnings in respect of any “Qualifying Amount” of “Relevant Motoring Expenditure” (RME) as defined by the legislation.
Paragraph 7A of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001 sets out a disregard for NICs:
(1) To the extent that it would otherwise be earnings, the qualifying amount calculated in accordance with regulation 22A(4).
HMRC argued that the reference to regulation 22A meant that the disregard in paragraph 7A could only apply to a “Qualifying Amount” (QA) paid as part of RME. LOR argued that the disregard could apply in respect of anything which was a QA irrespective of whether it was RME.
The FTT agreed with HMRC and found that Paragraph 7A only applies to the QA part of RME so that if the payments are not RME they cannot benefit from the disregard.
Firstly, the FTT felt that the repeated use of the words “the payment” in regulation 22A naturally took the reader back to the payments identified by that regulation (RME) and indicated that the QA was intrinsically bound within the provisions identifying RME. Had this not been the intent of the drafter, it would have been simple to disassociate the two, but this had not been done.
Secondly, had there been any ambiguity in the wording (the FTT obviously felt that there was not), then applying the principles from the appellate committee of the House of Lords in Montila and from Brown v Innovatorone [2009] EWHC 1376, the FTT could look to the heading of paragraph 7A, which makes clear that the provision is specifically dealing with the QA element of RME.
Citing the Cheshire Employer case, HMRC contended that must be a necessary connection with the “use” of a qualifying vehicle for a payment to be RME and as the payments bore no resemblance to the miles driven or to actual or anticipated use, but were simply paid in lieu of the provision of a company car, the payments could not be RME.
Against this, the company argued (also citing Montila) that the heading of regulation 22A, which used the phrase “amounts to be treated as earnings in connection with …” envisaged a much wider scope.
The FTT considered comments made in Cheshire Employer concerning the broad alignment of income tax and NICs rules in this area, and the fact that regulation 22A cross refers in several parts to ITEPA 2003, but that this still envisaged that differences existed between the two regimes.
The FTT placed some emphasis on the word “relevant” in connection with motoring expenditure, which narrows the scope of regulation 22A by means of the cross reference to s. 229, ITEPA 2003 (governing tax relief for Mileage Allowance Payments) to business travel.
Applying this to the cash allowances in dispute, it was clear that the payments were not for business travel. The amounts were fixed irrespective of business (or private) travel and the amount payable was determined only by job grade.
Accordingly, the payments were not RME and the appeal was dismissed.
Having determined that the payments were not “Relevant Motoring Expenditure”, and that a disregard could only be given in respect of the “Qualifying Amount” of such payments, it was inevitable that the disregard could not be applied and therefore the full amount of the payments were subject to NICs.
For allowances to be RME, it is clear that reasonable attempts must be made to quantify the anticipated expenditure in respect of business use, even if this is performed on a “broad brush” basis.
[1] The Appellant (“LOR”) appeals against the decisions issued by the Respondent (“HMRC”) under section 8 Social Security Contributions (Transfer of Functions, etc.) Act 1999 that LOR paid the correct amount of primary and secondary National Insurance Contributions (“NICs”) on payments made to employees in the period from 2004/2005 to 2017/2018 under a car allowance scheme (“the Scheme”) and was not entitled to any refund of the NICs. In essence, the Scheme allowed employees who were entitled to receive a company car the choice of payments under the Scheme (“the Payments”) instead of the company car, provided that the employee had a car available for use which met specified requirements.
[2] In summary, LOR claimed that an amount of the Payments falls within what regulation 22A of, and paragraph 7A of Part VIII of Schedule 3 to, the Social Security (Contributions) Regulations 2001 (“the 2001 Regulations”) refer to as the “Qualifying Amount” (“QA”) and, as a result, should not be subject to NICs. HMRC say that QA is limited to payments of “relevant motoring expenditure” (“RME”) defined in regulation 22A and the Payments were not RME. LOR say that if the QA disregard for NICs is limited to payments of RME that disregard still applies as the Payments are RME.
[3] Alternatively, LOR say that the Payments were not “earnings” for the purposes of NICs.
[4] The quantum of the claim has not yet been determined and is not a matter for this decision. The parties have agreed that if LOR succeeds in its appeal, the quantum will then be addressed by them.
[5] On 29 November 2010 the Appellant wrote to the Respondents attaching a protective claim for a reimbursement of Secondary NICs on payments made to employees for the use of employee-owned vehicles...
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Willmott Dixon Holdings Ltd
...Regulations 2001 (the Contributions Regulations). The FTT quickly agreed with the decision in Laing O'Rourke Services Ltd [2021] TC 08161, that for the disregard to apply, the car allowances must first be “relevant motoring expenditure” (RME). The relevant definition of RME is contained in ......