Laing O’Rourke and Kunjur: Two important employment tax cases with wide-reaching implications
We set out the outcomes of two employment tax cases which carry important considerations for advisers in terms of qualifying employment-related expenses.
Two tax cases were recently decided at the Upper Tribunal which concern themselves with expenses payments. The first, Laing O’Rourke, centres on the National Insurance Contributions (NICs) legislation and its interaction with the payment of mileage allowances. The second, Kunjur, concerns itself with the tax relief for living accommodation expenses claimed by a trainee surgeon whilst living away from his home during the week to complete his studies and on-the-job training.
Laing O'Rourke case
This case, Laing O’Rourke Services Limited v HMRC and HMRC v Willmott Dixon Holdings Limited  UKUT 155, which is two cases with very similar circumstances heard simultaneously, serves as a reminder that National Insurance (NI) legislation is not always aligned with income tax legislation. The NI treatment of mileage allowances is an example of this misalignment, as it differs to the income tax treatment. The Social Security (Contributions) Regulations 2001 s.22A deals with Relevant Motoring Expenditure (RME) and states that RME is only treated as earnings for NICs purposes if it exceeds the amount that an employer can pay NI-free – known as the ‘Qualifying Amount’ (QA).
RME and QA
RME is defined in the National Insurance Manual (NIM) 05820 as:
- A mileage allowance payment, or
- An amount that would be such a payment but that is paid to another for the benefit of the employee, or
- 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.
According to NIM 05830, the QA is arrived at by multiplying the relevant approved mileage rate by the total business miles being paid.
What did the employers do to instigate their respective disputes?
Laing O’Rourke and Willmott Dixon both operated car allowance schemes (i.e. company car or equivalent car allowance). Both had subjected the cash allowances to income tax and NICs in full as one might expect, under s. 62 ITEPA 2003. It is likely that they did not realise there was an NICs misalignment until the payments had been made over a number of years.
However, both employers then submitted repayment claims for class 1 NICs for all employees with business mileage which they considered did not exceed the QA. HMRC refused the claims. Both employers then proceeded to appeal to the First Tier Tribunal – Wilmott Dixon were successful and had their appeal allowed, but Laing O’ Rourke were not. The Wilmott NICs refund claim was for £1.5m and Laing O’ Rourke were claiming £2.25m. Note that Wilmott Dixon made their claim following the successful 2012 Court of Appeal decision in Cheshire Employer and Skills Development Ltd (formerly Total People Ltd) v HMRC  EWCA Civ 1429.
When HMRC appealed the Wilmott Dixon decision, and Laing O’Rourke appealed their decision, the Upper Tribunal decided to hear both cases together. They dismissed HMRC’s appeal and allowed Laing O’Rourke’s, having satisfied themselves that the car allowance payments were earnings and RME.
This meant the QA could be deducted from the value of the allowances paid, which then triggered an entitlement to a refund of NICs paid in excess.
HMRC had until 4 September 2023 to appeal the decision – and has confirmed it will not appeal.
ICAS members should speak to clients, fleet managers and/or HR departments about this matter in case similar circumstances have occurred, so that NICs can be rightfully reclaimed.
In HMRC v Jayanth Kunjur  UKUT 154 (TCC), the Upper Tribunal (UT) overturned the decision from the First-Tier Tribunal when they confirmed the living accommodation expenses incurred by Mr Kunjur did not qualify for tax relief under S.336 ITEPA 2003. This was because they were not “wholly, exclusively and necessarily “ incurred in the proper performance of the employee’s duties.
Mr Kunjur trained as a junior doctor between 2012 and 2016 at St George's Hospital in Tooting. Formerly a dental surgeon with 17 years of experience, he had retrained as a maxillofacial surgeon. His job required him to be on-call for two nights a week and within 30 minutes of the hospital. He also needed to regularly take phone calls during the night.
His home was in Southampton, and he rented living accommodation close to the hospital to ensure that he could be on call. Mr Kunjur claimed a proportion of the rental expenditure as a deduction from employment income in his tax returns. HMRC denied the deductions and issued assessments, closure notices, and a penalty.
On appeal to the First Tier Tribunal (FTT), it was held that Mr Kunjur had to meet the three elements of s.336(1) ITEPA 2003 (known as the “wholly, exclusively and necessarily” test). Unusually, the FTT also consulted the less rigorous test in s.34 ITTOIA 2005, which deals with expenses for the self-employed and a “wholly and exclusively” test. On examination of the fact pattern, the FTT decided that Mr Kunjur should be granted a partial tax deduction because some of the work he carried out could be done from his rented accommodation, such as research, taking calls and providing advice.
HMRC appealed to the UT on the grounds that the FTT had erred in law, leading it to arrive at a perverse conclusion – indeed, most employment tax experts would probably agree that the FTT did appear to have been distracted from applying the strict requirements set down in the S.336 ITEPA test which should have been applied to this tax relief claim. Mr Kunjur was, after all, an employee.
Upper Tribunal decision
The UT decided that Mr Kunjur had failed the test at Section 336 ITEPA 2003, stating in paragraphs 33 and 34 of the decision:
33. “We accept that the Premises were being used whilst Mr Kunjur performed his duties, but expenditure on the Premises was not incurred in the performance of the duties. Rather, it was incidental expenditure which provided Mr Kunjur with accommodation from which he could, amongst other things, take calls and carry out research. It put him in a position to do the work he was employed to perform, but he did not incur the expenditure in the performance of the duties of his employment.
34. We are therefore satisfied that the FTT erred in law in finding that the expenditure on the Premises was incurred by Mr Kunjur “in the performance of his duties”.
ICAS members should take the opportunity to speak to their clients to review any employment-related expenses that may be being claimed and ensure that employee handbooks contain clear and unequivocal guidance. There appears to be no sensible reason why this case even ended up in the Tribunal.
Mr Kunjur made the claim because subjectively he believed that he was incurring partial work-related expenditure, when in fact, it was his own personal choice which drove his decision to rent the apartment and live there. He could have stayed in student accommodation but chose not to, as he was a mature student. The act of putting himself in a position to carry out his duties did not mean he incurred the expenditure in the proper performance of his duties. It is this distinction which employers and employees alike need to be clear about.
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