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RAY CHIDELL looks at some of the practical issues surrounding the new rules for reimbursing business mileage travelled in privately owned cars.
EMPLOYERS MAY FROM 6 April 2002 reimburse up to 40 pence a business mile driven in a privately-owned car, without causing the director or employee concerned to incur a tax or National Insurance charge. This rate applies for the first 10,000 business miles in any given tax year. Any additional business mileage may be reimbursed at a lower rate of 25 pence a mile.
RAY CHIDELL looks at some of the practical issues surrounding the new rules for reimbursing business mileage travelled in privately owned cars.
EMPLOYERS MAY FROM 6 April 2002 reimburse up to 40 pence a business mile driven in a privately-owned car, without causing the director or employee concerned to incur a tax or National Insurance charge. This rate applies for the first 10,000 business miles in any given tax year. Any additional business mileage may be reimbursed at a lower rate of 25 pence a mile.
The fixed profit car scheme thereby ceases to apply. The employee is not entitled to claim capital allowances in respect of the car, nor does he have the option to claim on the basis of actual expenditure incurred. No tax relief is due for any interest costs incurred in buying the car in the first place, and no dispensation is required for payments made at or below the approved rates.
Multiple employments
If an individual has more than one employment, he may have more than one amount of 10,000 miles that can be paid at the higher rate. This will be exceptional, however, as associated employments have to be treated as one for these purposes.
Employments are associated with one another if any of the following applies:
- the employer is the same; or
- the employers are 'partnerships or bodies' under the common control of an individual or of another partnership or body; or
- the employers are associated companies (as defined).
More than one car
If an employee, working for a single employer, has more than one privately-owned car (or van, or combination of cars and vans) used for the business, then there is still only one amount of 10,000 miles for which reimbursement can be made at 40 pence a mile.
Passenger payments
In its Employer's Bulletin dated September/October 2001, the Revenue warned of a possible insurance complication where passenger payments are made. The Revenue said that: 'It is a good idea to advise your employees to check with their insurance provider that the new approved mileage system does not create a problem with their policy. This is especially important where you choose to pay a passenger rate of up to 5 pence a mile to encourage car sharing on business journeys. Drivers of smaller cars receiving 40 pence a mile will need to check that the insurance company is satisfied that no profit or reward is involved and their insurance remains valid'.
This possible risk has to date received very little publicity.
Excessive payments
Nothing in the legislation stops employers paying higher mileage rates. Some employers may choose to reimburse 40p for every business mile even to employees who cover more than 10,000 miles. However, any excess over the approved amount is taxable.
Lower payments
Other employers will pay less than the approved rate. In this event, an employee can claim tax relief on any shortfall compared with the approved amount of mileage allowance payments.
A few employers will not reimburse any business mileage. Tax relief can then be claimed on the full amount that could have been reimbursed using the approved amounts.
Tax relief on any shortfall does not, however, apply to passenger payments where the employer chooses not to make such payments; no relief may be claimed for passenger mileage payments that are not made. This produces some opportunities for planning, as shown in the Example.
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Example Jack drives 8,000 business miles and has a qualifying passenger for 5,000 of those miles. Jack's employer is entitled to pay up to £3,450 tax free, calculated as 8,000 miles at 40 pence a mile (£3,200) plus 5,000 miles at 5 pence a mile (£250). Suppose, however, that his employer reimburses only £3,200. If this is all expressed as being approved mileage allowance payments, with no passenger payments, then there is no tax liability but the employee cannot claim tax relief on the shortfall of £250. If, on the other hand, the employer states that he is paying £250 as a passenger payment and a reduced amount of £2,950 as the approved mileage payment, then the employee can claim tax relief on the shortfall of £250, saving up to £100 in tax. |
The above has been adapted from the new second edition of Company Cars just published by ABG Professional Information.
