A Total U-Turn

[This article originally appeared in Taxation magazine on 11 October 2012]

Had somebody told me a year ago that I would today be sitting in the Royal Courts of Justice hearing round 3 of this tax appeal I would never have believed them. Nor could I have even begun to guess exactly what goes on in those hallowed rooms once the doors are shut. The experience is one I shall not forget lightly.

Recap of facts and law:

Just to remind ourselves of the facts in this long running saga. Total People Ltd. employed about 160 staff who drove their own cars and who in the tax years 2002-03 to 2005-06 inclusive received, either 40 pence per business mile, if they did under 2,500 business miles per annum, or 12 or 13 pence per business mile for fuel plus a monthly car allowance which was paid in addition to their salary and which was meant to cover business motoring costs, if they did over 2500 business miles per annum. The car allowance was basically to cover wear and tear and depreciation of having to fund a car to use on business. Total People argued that part of the car allowance was therefore no different from the 40 ppm that staff with their own cars can claim as tax free under AMAPS (Approved Mileage Allowance Payments) in accordance with S229-230 ITEPA 2003.

Total People argued in the First Tier Tribunal that the car allowance payments were NOT general earnings and so could be construed as “Relevant Motoring Expenses” within the meaning of Regulation 22A of the Social Security (Contributions) Regulations 2001 as amended and which were therefore applicable at all times material to this appeal.

Recap of Round One – First Tier Tribunal (FTT) (1-0 to taxpayer)

Total People Ltd argued that part of the car allowance should not have been subject to Employer’s NIC and asked for a NIC refund of £146,000 or around £1,000 a head.

The regulation appears clear in that a payment is an RME if it is any other form of payment….. in respect of the use by the employee of a qualifying vehicle.

To the extent that this payment exceeds QA or number of business miles travelled x 40 ppm (now 45 ppm) then the excess is to be treated as earnings and that point is not in dispute.

In the First Tier Tribunal HMRC argued that the car allowance was not an RME because it was caught as general earnings, i.e. a contractual entitlement akin to salary and not for the use of the car.

The First Tier Tribunal judge quoted at Para 13:

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

He concluded:

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.

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

From reading the case it is clear that the parties did not address themselves to the question of whether any lump sum was an RME since on a straight reading the judge strongly infers that both sides were satisfied that it would be an RME if eth general earnings argument were to fail. HMRC’s only argument seems to have been that ‘normal earnings rules’ trump RMEs (Reg. 22A (1)) and so RMEs don’t come into play.

At Para 2 the judge states “Most of the facts were not in dispute”. The only fact to be determined was whether the lump sum payment (which was paid monthly) was earnings and the conclusion of that case was that they were not earnings and therefore the RME claim succeeded.

Recap of Round Two – Upper Tier Tribunal (UTT) (1-0 to HMRC, 1-1 overall but HMRC win on count back if you are a golfer)

In Round 2 the judge in the Upper Tribunal, Judge Bishopp, took a somewhat different view from his predecessor. He did agree that these monthly lump sum payments were not General earnings and also agreed that the lump sums were indeed payments for motoring expenses but did not accept they were “relevant motoring expenditure” (RMEs), even though at Para 18 he states:

Although it is agreed that the only relevant condition is 22A (3) (c), it is in my view necessary to examine also what is said in (a) and (b)”

Now here one has to be careful. The above quote is from the re-write of his decision rather than the first since the judge clearly felt compelled to re-write his opinion following an outcry from Taxation Magazine – See 25 September 2011 edition, the taxpayer, their advisers and many other interested parties, in order to clarify his reasoning. Any references below are to that re-write opinion.

In his re-write Judge Bishopp went on to add that condition (a) which refers to S229 (2) ITEPA brings with it a linkage to actual miles driven. This is not unsurprising as that condition is purely talking about linking the 40 ppm x the number of miles driven / claimed.

He appears to overlook the fact that in applying RME-QA there is already a linkage to miles in the definition of QA and so that position is catered for in our case. It is not necessary that the lump sum (RME) itself has to be linked to mileage. The First Tier Tribunal explained the commercial rational of how the lump sums were calculated and it was neither necessary nor relevant to link that payment to business miles travelled. The claim was itself limited to 40 p x the number of business miles driven.

Interestingly, he does state that Mr Adkinson for HMRC told him that he had not made concessions which the first Tier tribunal judge recorded; namely “If the lump sums were not earnings the respondents (HMRC) ACCEPT that they would be part of the RME.”

He then goes on to explain that condition (b) is just an extension of condition (a) and sites as an example “An employee may be able to obtain fuel while travelling on business by using a payment card, the employer bearing the cost.”

However, there are fundamental differences here. Where a payment is made by fuel card, there is no direct connection to the business miles driven as the payment is of course for all fuel. Even if only business miles were driven, then a payment by fuel card would equate to the Advisory Fuel Rate of 12 or 13 ppm whereas condition (a) and ITEPA s.229 are talking about AMAPS and 40/25 ppm.

It is the difference between these two rates which seems to undermine the logic used by the judge.

However, surely all this is irrelevant because it is clear that the car allowance payments fall within condition (c).

Judge Bishopp also states “But again one sees the phrase ‘in respect of the use by the employee’ of the vehicle.”

Having read and re-read Reg 22A, there appears to be no other reference to the phrase ‘in respect of the use by the employee’. That phrase appears once and only once and is to be found only in condition (c).

He justifies ignoring condition (c) on the basis that he could not understand why the parliamentary draftsman would have put in restrictive conditions (a) and (b) only to widen the scope of what could be regarded as an RME in condition (c). He expounds on this theory as follows:

In my judgement condition (a) sets the scene; the purpose of (b) and (c) is to bring within the definition payments which might not fit within (a), but which are of the same character.

Now if he is right and that is how one is meant to read all tax legislation that has an “OR” rather than an “AND” then there would seem to be a whole raft of legislation that has been misread by all of us for years, and it would take tax legislation to new depths of uncertainty and it would be alarming if such a judgement were allowed to stand. I would therefore hope that the appeal by Cheshire Employer and Skills Development Limited (formerly Total People) should be allowed as the facts are not in dispute, only the interpretation of conditionality and the word “OR”!

Round Three – The Finale? So what actually happened in Court?

Psychologists amongst you will know what I mean by Theory of Mind:

Theory of mind is the ability to attribute mental states—beliefs, intents, desires, pretending, knowledge, etc.—to oneself and others and to understand that others have beliefs, desires, and intentions that are different from one’s own.

I had clearly misjudged how events would proceed today and assumed the main thrust of Giles Goodfellow QC acting for the taxpayer, hereafter referred to as Total People, would be to discredit the reading of law of Bishopp in the UTT.

Instead as the day proceeded it became very clear that all parties put very little if any sway by what Bishopp had said and indeed seemed to dismiss the whole of the UTT proceedings.

One judge referred to that decision as “Profoundly unsatisfactory”, another summed it up by saying the whole judgement had been an Obiter as the first case was not about whether the payments were RMEs but whether they were earnings, whereas Bishopp chose to play on a different fairway from the FTT.

The judges at the Court of Appeal did not wish to add Obiter to Obiter and therefore decided to address themselves to the fundamental question which was “Were these monthly lump sum payments Earnings?”

And based on the evidence and facts before them, would any other reasonable judge sitting at the FTT have come to the same decision as the first judge, Richard Barlow?

If they were earnings then the appeal is lost. However if they were not then there is a very interesting sting in the tail for HMRC; see later.

A number of cases were sited not least Donnelly v Williamson (54TC636) in which a school teacher received a car mileage allowance for travelling to parents’ evenings – something she was not obliged to do at that time under the terms of her employment. It was not a payment of earnings because she was performing duties outside her contractual duties and it was not in respect of the services she gave. But there was a rough calculation to evidence the linkage between the amount of the allowance and the expenses defrayed by the schoolteacher. In that case the judge held that as long as there was a system of allowances intended to produce approximately the right result, with approximately equal justice to all, then such an allowance would not be earnings but instead be viewed as effectively tax free expenses.

Goodfellow argued that there was a link between the amount of the monthly allowance and the business mileage and therefore costs of the staff.

First, to qualify for the allowance one had to drive 2,500 miles pa otherwise a 40 ppm payment would have been made instead.
Secondly, that allowance; typically around £300 per month, was pro-rated down for part time staff and for those who had predominantly office based jobs as opposed to field based, i.e. two staff with the same job would receive different allowances based on their expected number of days on the road.

Thirdly, there had been a scientific analysis by considering an average driver doing 7,500 business miles and 7,500 private miles p.a. based on the running costs of a Ford Mondeo. The break-even was set accordingly. As it transpired, the average driver did about 8,000 business miles pa and so the average driver actually lost out under the lump sum arrangement and would have been better off under the 40 ppm – but that would have cost the employer more which is why the employer had this dual reimbursement policy and its motivation was to discourage excessive business motoring.

Without wishing to temp fate by lunchtime it seemed that all of the judges were sympathetic to the views of Goodfellow.

After lunch the judges opened by coming to the conclusion that the UTT should be set aside and therefore asked if Goodfellow was happy to stand by the decision of the FTT.

Interestingly only 7 days before this trial HMRC had re-appealed and submitted arguments disputing afresh what had been decided by the FTT and, surprisingly, Goodfellow was content to run that argument again for the Court of Appeal to decide if the FTT had got it right. One judge commented that the gesture by Goodfellow was “Very honourable” even though the appellants had not had sufficient time to muster their arguments and build a case to effectively re-try the arguments made at the FTT.

HMRC’s position

Richard Vallat QC for HMRC then stood up to put his case and started by wishing to examine the law and the judgement that was made at the FTT giving his views as also as to the judgement that should have been made.

He repeated the doctrine in Donnelly but said that the range of business mileage driven by the 160 staff at Total People varied from 2,500 up to 12,000 miles p.a. and the types of card being driven also varied considerably. The actual costs per person differed widely and so to take a broad brush approach of £300 per person may have led to a loss for some drivers but would also have led to a gain for others. If it was clear that some staff were to gain or enjoy a profit then such a profit would be caught as general earnings because a) it was a profit and b) it derived from employment – citing Kuehne + Nagel Ltd.

The allowance was therefore overgenerous and being so was in his view earnings.

He went on to say there are three arguments the FTT should have addressed itself to, namely;

Is this payment:

  1. Salary;
  2. Over generous allowances; or
  3. RMEs

The FTT struck out 1) salary. The UTT struck out 2) RMEs. De facto it must be over generous allowances.

The FTT had erred in law in not considering this argument and reaching the conclusion that it was over generous earnings.

The Judges’ views

One Justice took a different view. They struggled to see how the FTT could err on a point which had not been discussed and which it was not their duty or responsibility to raise. If HMRC held this view, then they should have advanced it at the FTT and not raised it now.

Another Justice asked Vallat what possible objection HMRC may have to this case when the taxpayer has done no more than to claim up to the 40 ppm x number of business miles. The taxpayer had not sought to claim the whole amount as tax free but had limited itself to the relief in Reg. 22A.

After a short interval the Justices returned to announce that they would be sending a written decision to both QCs with a few weeks.

In tax one can never be certain, but as a mere spectator I could not help but think and believe that the taxpayer had a strong case and their Lordships were leaning in their favour.

NOW FOR THE STING.

If we assume that the lump sum is not an overgenerous payment and therefore earnings and if we assume it is not earnings under general principles (FTT) and that it is not RMEs under the Obiter in UTT, then it becomes a tax or NIC Nothing!

If the point is not clarified then the whole of the cash allowance becomes tax and NIC free and not just the excess of RME-QA.

This could cause HMRC to appeal the UTT which they in fact won, because to let it stand could cost them more than had they stood to lose.

Appealing a case which you had previously won would indeed be a sight to behold and you can count me in on that for another day in Court.