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HMRC internal manual

National Insurance Manual

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 SSCR 1979 (from 1/10/98 to 5/4/01); Paragraph 3 of Part 8of Schedule 3 to the SSCR 2001 (from 6 April 2001)


From 6 April 1998 to 5 April 2002, reimbursed business travel costs incurred injourneys which qualify as business travel, including business mileage undertaken in aprivately owned car, are disregarded from earnings for the purposes of calculating NICsliability. NICs are due only where the reimbursed travel expense has not been incurred incarrying out the employment or the payment is excessive in relation to the actual expenseincurred. 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 theemployee 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 employeeswho use their own cars for business purposes is impracticable when set against the need toassess NICs liability using a prescribed earnings period. To overcome these difficultiesthe Inland Revenue offered an administrative arrangement based on the InlandRevenue’s Authorised Mileage Rates (AMRs).

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

Lump sum payments

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

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 earningsspecific and distinct expenses actually incurred by the employee whilst carrying out hisemployment, see NIM05020.

The difficulty with lump sum payments is that they are normally paid regardless of thenumber of miles actually travelled, so establishing whether there is any profit can provedifficult. For example, an employee who undertakes 5,000 business miles in the tax yearmay 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 sumpayments.

To overcome the difficulty of assessing the extent of the profit contained in the samelump 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 andclearly be intended to do no more than reimburse employees for the costs associated withusing their privately owned cars for business purposes. A payment that is more generallydirected at the overall costs of owning a car will not satisfy this test. A lump sum thatcovers some of the standing costs of owning a car (such as insurance) can qualify, if itis 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 ownedcar for business travel the lump sum is treated in the same manner as any other round sumallowance, see NIM06160.

Difficult cases

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