New tax implications for car allowance payments

The impact of the Willmott Dixon and Laing O’Rourke Tribunal

The 2023 Upper Tribunal decision in Willmott Dixon and Laing O’Rourke v HMRC [2023] has significant implications for businesses that provide car allowances to employees and directors.

This landmark ruling challenges HMRC’s longstanding position on “relevant motoring expenditure” and could reshape how car allowance schemes are structured and taxed.

In this blog, we’ll explore what this means for employers and employees alike.

Understanding car allowances

Before diving into the tribunal case, let’s clarify what car allowances are.

A car allowance is a fixed sum paid to employees instead of providing a company car. The employee then uses this allowance to fund their own vehicle, which they use for both business and personal purposes.

Traditionally, these arrangements have been subject to specific tax treatments:

• The allowance itself is treated as taxable income for the employee
• Employees can claim tax relief on the business portion of their actual motoring expenses
• Alternatively, employees can use HMRC’s Approved Mileage Allowance Payments (AMAPs) rates for business miles

The Willmott Dixon and Laing O’Rourke Cases

The Willmott Dixon and Laing O’Rourke cases weren’t specifically about car allowances, but their findings have direct relevance to them.

Key Findings with Implications for Car Allowances

#1 Capital Costs Are Included

The Upper Tribunal ruled that “relevant motoring expenditure” includes both running costs (fuel, insurance, maintenance) AND capital costs (depreciation or lease payments). This contradicts HMRC’s previous position.

#2 Proportionate Claiming Allowed

Expenses can be apportioned based on business versus private use.

#3 Documentation Requirements

Proper mileage records and evidence of expenses remain essential.

How this affects car allowance arrangements

For employers

Review your car allowance policy

The Tribunal’s decision potentially increases the tax efficiency of car allowance arrangements. Employers might consider:

• Replacing company car schemes with structured car allowances
• Adjusting allowance amounts to reflect the potential for greater tax relief
• Implementing clearer requirements for record-keeping

Consider documentation requirements

Employers should:

• Provide guidance to employees on maintaining mileage logs
• Consider systems or apps that facilitate easier record-keeping
• Establish clear protocols for reimbursement claims

Tax Implications

While car allowances remain subject to income tax and National Insurance contributions, the ability for employees to claim relief on a broader range of expenses may make them more attractive than company cars in some cases.

For employees and directors receiving car allowances

Broader Expense Claims

If you receive a car allowance, you may now have grounds to claim tax relief on:

• Fuel costs for business journeys
• Insurance, maintenance, and repairs (proportionate to business use)
• Road tax and MOT costs (proportionate to business use)
• Depreciation or lease costs (proportionate to business use)

Record-Keeping Is Crucial

To benefit from this ruling, meticulous records are essential:

• Track all business journeys with dates, purposes, and mileages
• Calculate your total annual mileage to establish business/private percentages
• Keep all receipts and documentation of vehicle expenses
• Document the purchase price and depreciation calculations

Comparing Options

You should now compare three options:

1. Using the simplified AMAP rates (45p per mile for the first 10,000 miles, 25p thereafter)
2. Claiming actual expenses, including running costs only
3. Claiming actual expenses, including both running AND capital costs

For expensive vehicles with significant business use, the third option may now be most advantageous following the Willmott and Laing decisions.

On top of potential tax savings, by definition, not all of the car allowance may be chargeable to Class 1 National Insurance Contributions (NIC). This will affect both employee and employer, and it is certainly worth a little time undertaking calculations to see what, if any, NIC may have been overpaid. Of course, if NIC has been overpaid, the employer will need to recover both Employees’ and Employers’ NIC from HMRC, and pass the employees’ savings onto the employee for the current year and available open tax years.

Practical example

Let’s see how this might work in practice.

Alison receives a £500 monthly car allowance (£6,000 annually).

• She drives a car worth £30,000
• Annual depreciation is £6,000
• Her annual running costs are £4,000.
• She uses the car 60% for business purposes.

Pre-Willmott and Laing – Alison could claim tax relief on 60% of her running costs:

£4,000 × 60% = £2,400

Post-Willmott and Laing – Alison can potentially claim tax relief on 60% of BOTH her running costs AND her depreciation:

(£4,000 + £6,000) × 60% = £6,000

Tax impact – at a 40% tax rate, this represents an additional £1,440 in tax relief annually.

HMRC’s likely response

It’s important to note that HMRC may:

• Appeal this decision to the Court of Appeal
• Issue specific guidance on car allowances
• Potentially seek legislative changes

Until there’s clarity, those with car allowances should:

• Consider making claims in line with the Tribunal’s decision
• Ensure robust documentation to support any claims
• Stay informed about any appeals or guidance from HMRC

Recommended actions

For Those Currently with Car Allowances:

• Review your vehicle expenses and calculate potential additional tax relief
• Implement comprehensive mileage tracking if not already in place
• Consider consulting a tax professional to assess your specific situation

For Businesses:

• Review your car benefit policies
• Consider whether car allowances might now be more tax-efficient than company cars
• Develop clear guidance for employees on documentation requirements

For Everyone:

• Stay informed about any HMRC appeals or guidance
• Consider making protective claims for open tax years
• Ensure any claims are well-documented and reasonable

The Willmott and Laing decisions represent a potential shift in how car allowances and associated expenses are treated for tax purposes. By including capital costs in “relevant motoring expenditure,” the Upper Tribunal has opened the door to increased tax relief for those receiving car allowances who use their vehicles for business purposes.

However, this remains an evolving area of tax law. Until HMRC clarifies its position, taxpayers should proceed cautiously, maintain excellent records, and seek professional advice for their specific circumstances.