Back on the road! Mileage expenses

Richard Curtis explains the allowances or reliefs available for an employee’s business mileage. 

At a time of rising fuel prices, employees who use their cars for business purposes will be keen to recover or claim tax relief for as much of the cost as possible.  

When considering tax relief for employee travel expenses, the basic rule is that “a deduction from earnings is allowed for travel expenses if (a) the employee is obliged to incur and pay them as holder of the employment, and (b) the expenses are necessarily incurred on travelling in the performance of the duties of the employment.” So what expenses are these likely to be?  

First, the obligation to incur the expense must come from the employment itself; and second, the cost must relate to performing the duties of the employment. Consequently, the expense of ordinary commuting from home to a permanent workplace will not be allowable – this simply puts the employee in the position to carry out their duties. Conversely, travelling to see a customer or visit other business premises should be allowable, as will travel to a temporary workplace to perform a task of limited duration or for some other temporary purpose (see tinyurl.com/2p8xuxb2). 

The mileage rates 

Self-employed individuals can claim a deduction for motor expenses by keeping a record of their costs as well as details of their business mileage. They could then claim a percentage of the costs reflecting the proportion of business to total mileage during the year. However, this option is not available to employees, who can only claim a deduction by reference to HMRC’s approved mileage allowances that purport to reflect these extra costs.  

Since 2011/12, the rates have been as follows: 

Reimbursement or claim 

From an employee’s point of view, the ideal situation is that their employer should reimburse them for the cost incurred. If the travel satisfies the conditions above, the employee receives a payment on which no income tax liability would arise. 

The employer could simply reimburse the cost of fuel used on motoring in carrying out the duties of the employment, but the mileage allowance aims to include elements for depreciation and repairs, as well as a proportion of the insurance and road tax costs. 

HMRC’s approved mileage rates have remained static for the past ten years in the face of increasing costs, but if the employer pays a higher rate, the excess will be treated as taxable earnings. 

In practice 

If the employer pays a lower amount (or indeed nothing), the employee can claim tax relief on the difference. For example, if Jo Bloggs travels 7,500 miles for employment purposes during the tax year and her employer pays a mileage allowance of 40p per mile, this would total £3,000. At the full HMRC rate, the amount due would be £3,375, so she could claim a tax deduction of £375. 

If the employer paid no motor allowance, Ms Bloggs could claim a deduction of £3,375. If she was liable to income tax at 20%, her tax liability would be reduced by £675, meaning that she would, in effect, have paid 80% of these costs from her taxed income. If liable at 40%, she will save twice as much tax but will have still paid for most of this employment cost herself. 

If the employment requires travel, then presumably the employer should cover these costs. If this does not happen, a claim for tax relief can offer an element of reimbursement. 

Practical tip 

Keeping accurate records of business mileage is essential to ensure that the correct claims are made for reimbursement or tax relief. Inability to justify an allowance paid may result in an income tax liability.