Few employees these days have company cars, as the tax charges on the benefit in kind of such a vehicle generally means that it is not cost-effective. Many employees instead they use their own cars for business journeys and their employer reimburses them. James Bailey highlights how all too often the arrangements for such reimbursement lead to unexpected tax liabilities.
The Approved Mileage Allowances
The basic rule is simple: An employee can be reimbursed for his business mileage in his own car at a rate of 40p per mile for the first 10,000 business miles in the tax year and 25p for each mile thereafter. In the case of a motorcycle the rate is 24p per mile no matter how many miles are done, and for a bicycle, the rate is 20p per mile (even if you do more than 10,000 miles on it!).
These rates are the only tax free way to reimburse employees for their business miles. If instead the employee is paid against petrol receipts, or gets a fixed sum each month, then these payments are taxable, subject to the employee making a claim for tax relief based on the 40p/25p rates above.
Business Miles
This is a whole subject in itself and beyond the scope of this article, but essentially, travel from home to work is not business mileage, but trips to see customers, to training courses, or to deliver goods are all examples of business mileage.
More Than One Car
The mileage rate applies to the employee, not to the vehicle, so if he has more than one car or changes cars during the year, this does not affect the rate at which he can claim. The claim is for 40p per mile for the first 10,000 miles driven by the employee, no matter which car he is driving.
More Than One Job
If the employee has more than one job, then provided the two employers are not “associated” (broadly, controlled by the same persons), then the 10,000 mile limit applies separately to each job. If the employers are “associated”, there is only one 10,000 mile limit covering all the “associated” employments.
Car Loans, Repairs, Etc.
The 40p per mile is deemed to cover all the costs of running the car, and any additional payments from the employer will be taxable.
Mileage Allowance Relief
If the employer pays less than the mileage rates described above, the employee can claim the difference as a deduction from his income from the job. If he does not normally submit a self-assessment return, he can make this claim after the end of the tax year on a form P87 – which can be downloaded from HMRC’s website (link here).
Passengers
If the employee takes any of his colleagues in his car on a work journey, then he can be paid an additional 5p per passenger per mile free of tax. Confusingly, however, if the employer does not make this extra payment to the employee, he cannot claim it as part of his Mileage Allowance Relief as described above.
Self-Employed
Self employed traders can use the mileage rates to claim their business mileage if they wish, provided their annual turnover at the time they acquire the car concerned is below the VAT threshold of (currently)£68,000.
If their turnover exceeds this figure, they have to work out the proportion of business miles to private miles and apportion their total motoring costs accordingly. If they use this method, they can also claim capital allowances on the cost of the car itself, again apportioned for business and private mileage.
For those with turnovers below the VAT threshold, it may still be beneficial to use the more formal method of claiming expenses, depending on the cost of their motoring and the amount of business miles they do.
Once they have chosen which method to use, they must stick with that method for as long as they use that particular car for business. When they change cars, they have another opportunity to decide which method to use.
Practical Tip
Unexpected tax liabilities crop up when using your own vehicle because the tax rules for such payments are very specific and somewhat inflexible. In other cases, employees may be entitled to more tax relief if they make the appropriate claim. Either way, it is advised that you do your homework!
James Bailey
