NIM05720 - Class 1 NICs: Expenses and allowances: Mileage allowances: Rules before 6 April 2002: General treatment of lump sum payments

Regulation 19(1)(zg) of the Social Security (Contributions) Regulations 1979 (from 1/10/98 to 5/4/01); Paragraph 3 of Part 8 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (from 6 April 2001)

This guidance needs to be read in the context of the NICS treatment that would have applied prior to 06 April 2002

Background

From 6 April 1998 to 5 April 2002, reimbursed business travel costs incurred in journeys which qualify as business travel, including business mileage undertaken in a privately owned car, are disregarded from earnings for the purposes of calculating NICs liability. NICs are due only where the reimbursed travel expense has not been incurred in carrying out the employment or the payment is excessive in relation to the actual expense incurred. In other words, liability for Class 1 NICs on reimbursed business travel costs, including mileage allowances, only arises where the payment does more than reimburse the employee the cost of the expense and, as a consequence, allows him to profit. See NIM06250 for more information about travelling expenses.

Mileage allowances

HMRC recognises that applying this strict principle to all cases involving employees who use their own cars for business purposes is impracticable when set against the need to assess NICs liability using a prescribed earnings period. To overcome these difficulties the Inland Revenue offered an administrative arrangement based on the Inland Revenue’s Authorised Mileage Rates (AMRs).

This administrative arrangement allows an employer to compare his mileage rates to the AMRs. Where the employer’s mileage rate is greater than the AMR, NICs are due on the excess, see NIM05710 and NIM05715.

Lump sum payments

In addition to a mileage rate some employers pay lump sum payments to employees who use their own cars for business purposes. These may be paid where the mileage rate is below the AMR and the lump sum is paid in recognition of the additional costs associated with using a car, for example servicing and repairs. Lump sums can be paid weekly, monthly or annually.

NIC treatment of lump sum payments

When considering how to treat the lump sum for NIC purposes, consider whether it isentirely to reimburse a business expense incurred in carrying out the employment orwhether there is an element of profit.

To do this it is necessary to consider the legislation which excludes from earnings specific and distinct expenses actually incurred by the employee whilst carrying out his employment, see NIM05020.

The difficulty with lump sum payments is that they are normally paid regardless of the number of miles actually travelled, so establishing whether there is any profit can prove difficult. For example, an employee who undertakes 5,000 business miles in the tax year may receive the same lump sum payment as an employee who undertakes 10,000 business miles. Employees who use their cars less frequently are likely to profit more from the lump sum payments.

To overcome the difficulty of assessing the extent of the profit contained in the same lump sum paid to employees who undertake varying amounts of mileage, the payment isincluded in a mileage profit calculation.

To be included in this calculation, the lump sum payment must be reasonably assessed and clearly be intended to do no more than reimburse employees for the costs associated with using their privately owned cars for business purposes. A payment that is more generally directed at the overall costs of owning a car will not satisfy this test. A lump sum that covers some of the standing costs of owning a car (such as insurance) can qualify, if it is calculated by reference to the business proportion of such standing costs.

Where the lump sum bears little relation to the actual costs of using a privately owned car for business travel the lump sum is treated in the same manner as any other round sumallowance, see NIM06160.