Substantial increases in tax charges over the years have removed much of the attraction of company cars; employees will often, instead, use their own car for employment purposes.
The tax legislation (in ITEPA 2003, s 336) provides a general rule that a deduction can be claimed for expenses that are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. However, section 359 states that this rule does not apply if mileage allowance payments are made to the employee for the use of their own vehicle, or if mileage allowance relief is available.
Mileage Allowances
Instead of the general rule for the deduction of expenses as above, ITEPA 2003, s 229 et seq provides the mileage allowance regime for the costs of business travel in an employee’s own vehicle. In brief, an employee can claim, or an employer can pay, an allowance for the use of the employee’s vehicle at a rate approved by HMRC. This is based on mileage when carrying out the duties of their employment, so a distinction must be drawn between (for example) the normal costs of commuting (which would be seen as simply putting the employee in a position to perform their duties) and the costs of actually carrying out their duties.
The rates per business mile set by HMRC are as follows:
First 10,000 miles Above 10,000 miles
Cars and vans 45p 25p
Motorcycles 24p 24p
Bicycles 20p 20p
These allowances will cover a proportion of the costs of depreciation and fixed costs such as insurance, vehicle excise duty, MOT tests, servicing and the like, as well as an element for fuel. Payments made at these rates will be exempt from income tax and National Insurance contributions (NICs).
For example, if Ms Smith travels 15,000 miles a year in her role as a sales representative and uses her own car, she could be paid £5,750 (i.e., 10,000 miles at 45p per mile and 5,000 miles at 25p per mile) in addition to her normal salary.
Sufficient records should be kept by the employee and employer to justify the amounts paid. If HMRC were to enquire into the payments and find that evidence of business mileage was lacking, substantial income tax and NICs liabilities may accrue. Note also that payments for expenses such as parking, congestion and clean air charges can be reimbursed by the employer or claimed as a deduction separately from the mileage allowance.
Mileage Allowance Relief
If the employer pays less than the rates above (or indeed nothing), the employee can claim a deduction for the difference from their salary.
For example, if Ms Smith was reimbursed by her employer for the use of her car at a fixed rate of 25p per mile, regardless of the total mileage, she would receive £3,750. She could claim a mileage allowance relief deduction of £2,000 (i.e., £5,750 less £3,750) from her salary. If her pay had been taxed at the basic rate, she would then receive a tax repayment of £400 (i.e., £2,000 at 20%).
If, on the other hand, the relevant motoring expenses paid to an employee exceed the qualifying amount based on the above rates, the excess is added to the employee’s other earnings for that period when calculating income tax and Class 1 NICs under the PAYE system.
Conclusion
While the ability of an employee to claim a tax deduction based on their business mileage at the above rates is beneficial, it would, of course, be better to persuade the employer to increase the mileage rate that they pay. Reimbursement recovers the full cost, while tax relief recovers only part.
Practical Tip
As well as the normal mileage rates above, if an employee has another employee as a passenger in their own vehicle on a business journey, ‘passenger payments’ can be paid. The HMRC approved rate is 5p per mile paid to the carowning employee free from income tax and Class 1 NICs.