First-tier Tribunal (Tax)

[2010] UKFTT 379 (TC)

TC00661

Appeal number:TC/2009/13848

NATIONAL INSURANCE CONTRIBUTIONS – relevant motoring expenditure or earnings? – held to be relevant motoring expenditure – employer’s overpayment refundable.

FIRST-TIER TRIBUNAL

TAX

                                       TOTAL PEOPLE LIMITED                      Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

TRIBUNAL: Richard Barlow (Judge)

Mrs Marilyn Crompton (Member)

Sitting in public at Manchester on 3 August 2010

Grant Summers of Grant Thornton for the Appellant

Richard Adkinson, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This appeal concerns the appellant’s claim to be entitled to a refund of over paid National Insurance Contributions for the four years ending 5 April 2003 to 2006.  The appellant submitted a claim on 8 May 2006 for the repayment of £146,165 and an appealable decision refusing that claim was given by the respondents on 11 September 2006.

2.       Most of the facts are not in dispute and we have heard only one witness, Mr Nigel Hartley the appellant’s managing director.  He was cross examined and we find him to be a truthful and reliable witness.  We also had 490 pages of documentary evidence before us and we have considered such of those documents as were specifically relied upon by the parties though the agreements between the parties in an Agreed Statement of Facts and Matters made it unnecessary to consider many of the documents.

3.       The appellant was formerly known as the South East Cheshire Training and Enterprise Council and its business has always consisted of the provision or placement of apprentices and other trainees with employers and the supervision of their training.  By the times relevant to this appeal, the appellant had become quite a large organisation and its staff numbered about 200 of whom some 160 or so were Training Advisors.  The Training Advisors had to visit the employers and the trainees at their places of work.  They specialised in certain trades and as the training places were scattered about an area covering Cheshire and parts of the adjoining counties there was a need for the Training Advisors to do a good deal of travelling in the course of their duties.  In practice, that could mostly only be done by car and motor travelling expenses were paid to the appellant’s staff as necessary but most of it was paid to the Training Advisors. 

4.       In principle motoring expenses were paid according to two “options” either as a straightforward mileage allowance payable at a rate per mile (Mr Hartley was unsure but thought it would be 40 pence per mile or thereabouts) or as a smaller mileage allowance of 12 and later 13 pence per mile plus an annual lump sum payable in monthly instalments.  The issue in this appeal is whether the appellant was right to pay National Insurance Contributions (NICs) based on the lump sums, which it had done, or whether, as it now contends, it was not obliged to do so; with the consequence that it is entitled to reimbursement of the over paid amount.  It is not in dispute that the mileage allowances of 12, 13 and 40 pence were correctly dealt with and that the appellant did not need to pay NICs in respect of the payments of those mileage allowances.

5.       The relevant statutory provision we have to consider is Regulation 22A of the Social Security (Contributions) Regulations 2001 as amended with effect from 5 April 2003 by the Social Security (Contributions) (Amendment No 2) Regulations 2002  and which were therefore applicable at all times material to this appeal.

6.       Regulation 22A reads:

“Amounts to be treated as earnings in connection with the use of qualifying vehicles other than cycles

22A.  - (1) To the extent that it would not otherwise be earnings, the amount specified in paragraph (2) shall be so treated.

(2) The amount is that produced by the formula - 

Here - 

RME is the aggregate of relevant motoring expenditure within the meaning of paragraph (3) in the earnings period; and

QA is the qualifying amount calculated in accordance with paragraph (4).

(3) A payment is relevant motoring expenditure if - 

(a) it is a mileage allowance payment within the meaning of section 197AD(2) of the Taxes Act;

(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.

Here "qualifying vehicle" has the same meaning as in Schedule 12AA to the Taxes Act, but does not include a cycle within the meaning of section 192(1) of the Road Traffic Act 1988.

(4) The qualifying amount is the product of the formula - 

Here - 

M is the sum of - 

(a) the number of miles of business travel undertaken, at or before the time when the payment is made - 

(i) in respect of which the payment is made, and

(ii) in respect of which no other payment has been made; and

(b) the number of miles of business travel undertaken - 

(i) since the last payment of relevant motoring expenditure was made, or, if there has been no such payment, since the employment began, and

(ii) for which no payment has been, or is to be, made; and

R is the rate applicable to the vehicle in question, at the time when the payment is made, in accordance with paragraph 4(2) of Schedule 12AA to the Taxes Act and, if more than one rate is applicable to the class of vehicle in question, is the higher or highest of those rates.".

7.       From 6 April 2004 the references to the statutes were substituted and reference was thereafter to sections 229(2), 235 and 230(2) of the Income tax (Earnings and Pensions) Act 2003 in place of those quoted above.

8.       The scheme of the regulation is therefore that any amount falling within paragraph (2) is treated as earnings if it would not otherwise be so treated.  An amount is within paragraph (2) if it is “relevant motoring expenditure” (RME) less any “qualifying amount” (QA).   The RME is defined in paragraph (3) and the QA in paragraph (4). 

9.       Overall therefore it is necessary to decide first whether sums paid to an employee as motoring expenses are earnings.  If they are, that is the end of the question and they are subject to NICs.  If the sums paid would not otherwise be earnings they are deemed to be earnings if they are RME as defined except to the extent that they are QA as defined.

10.    The parties were in agreement that the mileage allowance of 12 or 13 pence per mile (and indeed at 40 pence or so) fell within Regulation 22A(3)(a) and so were an RME but the respondents’ case was that the lump sums paid to the staff who qualified for them were paid as part of their wages and so fell outside the RME and NICs were payable in respect of those payments.  If the respondents’ argument was correct the consequence would be that the RME would consist of the mileage allowance only but it was accepted that that mileage allowance also fell within the QA so that the NICs were correctly not payable in respect of those mileage payments.

11.    In paragraph (4) of the Regulation the qualifying amount is the number of miles of business travel times the current rate (which was 40 pence per mile) and so, as the amount on which NICs are payable is the RME less only the QA, the effect is that a payment like the lump sums paid in this case or any mileage payment more generous than 40 pence per mile will still attract NICs but only to the extent that it exceeds 40 pence per mile.  The appellant accepted that and its claim is only for such sum as represents the difference between 12 or 13 pence per mile ie 28 or 27 pence per mile; leaving NICs payable on the excess. 

12.    The references to “no other payment” in paragraph (4) are there to prevent double counting of mileage where two or more payments are made and do not mean that where two separate payments are made they prevent the miles for which they are paid from counting towards the calculation of the QA.  

13.    The parties were in agreement that the calculations had been correctly made by the appellant subject only to the respondents’ contention that the lump sums should have been ignored because they were earnings and therefore incapable of falling within the RME.  If the lump sums were not earnings the respondents accept that they would then be part of the RME.

14.    The issue to be decided is therefore whether the lump sum payments were paid as earnings.

15.    According to schedules produced to us most of the employees who receive the lump sums received £3,600 per annum in the years 2002/03 and 2003/04, £3,667 in 2004/05 and £3,700 in 2005/06.  The amounts were reviewed with effect from 1 August each year and there was in fact only one increase in the four years in question.  It occurred on 1 August 2004 giving rise to a pro rata increase of £67 for the then current tax year.  A small number of more senior staff received £4,100 per annum which was increased to £4,200 from 1 August 2004 and two directors received £7,000 increased to £7,100.  The 160 or so Training Advisors received the £3,600 and £3,700 amounts.

16.      The contracts of employment do not show the lump sum as part of the salary. In a separate paragraph from the one dealing with salary some of the contracts of employment do state whether or not the post comes with a car allowance and in some cases the amount of that allowance is stated.  Mr Adkinson submitted to us that what someone calls a payment does not necessarily characterise it for tax purposes and we agree, though we do not regard it as entirely irrelevant that the contract between the appellant as an employer and the employee fails to mention the car allowance in the paragraph dealing with salary.

17.     The company’s “Travel Policy”, which is part of a Staff Handbook, says that there are two options namely either a “cash entitlement” which is the 12/13 pence per mile plus lump sum or “mileage expenses” which is the 40 pence per mile or thereabouts already referred to.  Which of these options will apply to a member of staff is stated to be subject to agreement with the service director or chief executive on appointment or promotion but Mr Hartley told us that in practice staff who were appointed to the posts that were likely to involve extensive travel on the appellant’s business were not given the option of electing for the 40 pence per mile option.  Staff who travelled only occasionally were entitled to the mileage expenses option as and when they did travel on business.  The cash entitlement was stated to be subject to the employee travelling at least 2,500 miles per annum on business and the level of lump sum was set according to salary.     

18.    The appellant also had a Driver Handbook which included a section on eligibility to the car allowance in much the same terms as the Staff Handbook. 

19.    Both documents say that eligibility for the cash entitlement is on the basis of a need to travel to trainees’ sites and the appellant’s other offices but they also state that for some senior posts the entitlement was “additional” by which we take it to mean that it was paid despite the fact that they did not have to do the same level of travelling as the Training Advisors. 

20.    The documents also state that the entitlement for senior staff to receive the lump sum payments will form “part of the recruitment package”.  Mr Adkinson stressed that and he said that treating the lump sum payments as part of the recruitment package was tantamount to admitting that the lump sum payment was effectively an addition to earnings.  He added that when the mileage covered by the senior staff, who were paid the higher lump sums, was examined they did not all cover the 2,500 miles apparently used as the basis for the award to the more junior staff.  Indeed some of the more junior staff who had fallen below the 2,500 mileage did not thereby lose their entitlement.  Those departures from the generality of the arrangements are statistically insignificant and we attach little if any significance to them.

21.    The lump sums were paid pro rata where a member of staff joined or left part way through a year or was a part time worker and where a member of staff took extensive sick leave the lump sum payments stopped when the employee ceased to be paid their full salary after 12 weeks.  Mr Adkinson argued that, as the lump sum payments could have been cancelled sooner than that, the fact that their suspension was linked to the reduction in salary was an indication that the lump sum was regarded as part of that salary.     

22.    Mr Adkinson also pointed out that one result of the lump sum payments was that the effective rate of travel allowance varied considerably from one member of staff to another in the same grade and with a similar job description because the more miles a member of staff travelled the less per mile the payments he received came to, which was inconsistent with the payments being truly for the travelling expenses.  As against that, the appellant argued that for the sake of the appellant’s image it had a policy of requiring staff to have what were called “suitable” cars in the Handbooks and what that meant was that they had to have reasonably good cars not “old bangers” as Mr Hartley put it and that the lump sums in part recognised that a member of staff might well have to take out a hire purchase or other loan to buy the car and needed to know what he could commit himself to by way of monthly instalments.

23.    The appellant increased its staff salaries by an inflation related percentage in each of the four years in question, which were in the region of 3-4% but, as is clear from what we have already said about the sole increase of the lump sum payments in that period, the travel allowance was not in any way linked to those increases and in fact was at a much lower level and occurred less frequently. 

24.    The NIC payments the appellant had to make would have been the same as those they now contend for if it had paid 40 pence per mile and Mr Adkinson urged us not to take that as an indication that the payments were not by way of earnings.  We agree that what we have to decide is whether the payments were earnings and the fact that the appellant could have achieved the same fiscal result in a different way does not say anything about whether they were earnings.  On the other hand the appellant’s rationale for structuring the payments in this way was that it considered that a 40 pence per mile structure risked encouraging staff to maximise their travel so as to maximise their profit, which they might have perceived they could make from the 40 pence payments, and that it was administratively more convenient. Mr Adkinson challenged the correctness of both of those contentions but we have no doubt that they were conclusions genuinely held by Mr Hartley, whether they were objectively right or wrong, and that as he was entitled to run the business according to his assessment of the best course for it to take those are relevant factors.

25.     Clearly there are indications, if taken separately, that could lead to a conclusion either that the lump sum payments were additions to salary or that they were paid as motoring expenditure but we have decided that, taking all the evidence into account, they were the latter.  The most important single piece of evidence is the absence of a link between the increase in salary and the increase in the motoring allowances.  The appellant’s rationale for structuring the payments as it did is also significant.

26.    Accordingly we find that the payments in question were not paid as earnings and so the appeal is allowed.

27.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

RICHARD BARLOW

TRIBUNAL JUDGE

RELEASE DATE:  12 August 2010