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I have recently acquired a modest trading company as a client. For several years, the sales representatives have driven their own cars and the company has reimbursed all their business motoring costs. The representatives have in turn claimed the full costs of business travel as a deduction under section 198, Taxes Act 1988 and the capital allowances as well.
I have recently acquired a modest trading company as a client. For several years, the sales representatives have driven their own cars and the company has reimbursed all their business motoring costs. The representatives have in turn claimed the full costs of business travel as a deduction under section 198, Taxes Act 1988 and the capital allowances as well.
Clearly the sales representatives must now restrict their claims to the statutory mileage rates from 6 April 2002. But the position for the company is less clear. In particular, they used to reclaim the VAT on the sales representatives' petrol (business proportion); they want to know if they can continue to do so. I was not aware that this was allowed but, if it is, I may recommend that they reimburse all the petrol costs and pay the scale charges in respect of the private mileage.
Even if this is in order for VAT, what would be the position for the tax and National Insurance treatment?
(Query T16,062) - Ichi.
The treatment of input tax on the running costs of an employee's car is unusual. If there is any business use of the vehicle, Customs allow a full deduction of the VAT on servicing, without requiring a disallowance or an output tax charge in relation to private use (see Leaflet 700/64/96, paragraph 28). This is conditional on the business bearing the cost of the servicing - it is not possible for the employer to claim 'indirect input tax' for the servicing element of a mileage claim, even though this is still possible for the fuel element (until Customs are forced to respond to the decision of the European Court of Justice in EC Commission v Kingdom of the Netherlands of 2001, in which it was held that employers should not be allowed to claim any input tax in relation to mileage allowances paid to employees).
On the other hand, if the business pays for any fuel used for private motoring, the scale rate applies (sections 56 and 57, VAT Act 1994). This means that the business deducts input tax on all road fuel purchased by the business, and accounts for output tax at the set rate per quarter on each car for which private fuel is provided. Customs prefer traders to use the scale rate, presumably because they regard it as much more clear-cut than what this client has been doing - if you want to pay for business fuel only, and therefore deduct a proportion of the input tax without accounting for the scale rate, you have to keep detailed records in order to prove that you are not paying for any private fuel at all (Leaflet 700/64/96, paragraph 3(d)).
As long as the Inland Revenue was satisfied that the employer reimbursed a justifiable figure for business use only, and the employees were therefore justified in making claims under section 198, Taxes Act 1988 for that same figure, there would be no income tax charge on either servicing or fuel.
From 6 April 2002, the employer can still pay exactly the same as was paid in the past, and can make the same input tax claims (subject to any changes following the Netherlands case). The employees will claim a deduction of 40p per mile up to 10,000 business miles and 25p per mile after that, from the amounts reimbursed to them. They may be better off doing this and they may be worse off - there now does not have to be any correlation between the two figures for income tax purposes. The employer will still be able to deduct the full amounts reimbursed, because they are all wholly and exclusively incurred for the trade.
This should make no difference to the VAT position. If they have kept records in the past to justify the avoidance of the scale rate, they can continue to do so. If they decided in the past that claiming all input tax and accounting for scale rates was a bad idea, there is no reason that they should now do so. If it is their business decision only to pay for business fuel, why should they be advised to reimburse all the petrol costs? They should only do that if they want to - it is not a tax issue. As a separate question, they need to be satisfied that they will not incur the scale charges anyway, because their records are not good enough to prove 'business use only'.
The tax position is that, without a dispensation, the payment of the running costs will be a benefit in kind (as long as the employer incurs the expenses, rather than reimbursing or settling employee liabilities - that would be within pay-as-you-earn). They will appear on forms P11D and will be subject to income tax, but net of the section 198 claim made by the employee. It appears likely that there will be Class 1A National Insurance liability on the whole amount reimbursed, unless the employer can satisfy the Inspector that the section 198 claim will wholly cover it - there is no partial deduction in calculating Class 1A National Insurance. The whole item will be charged, or none.
Similarly, if the employer reimburses the employee's running costs by paying the employee's own bills, that should be within the pay-as-you-earn system and Class 1 National Insurance contributions. There would then be a deduction of the mileage rate for tax, but not for National Insurance.
At least there can be no question of the income tax scale rates applying (for benefits in kind and Class 1A National Insurance) where it is the employee's own car. The VAT scale rates apply to private fuel provided for employee and proprietor alike, in a car owned by the business or by the individual - but the income tax fuel scale charge only applies to company cars. - Gardener.
The procedures of both the company and its sales representative employees with regard to the reimbursement and claiming of motoring costs have been correct until 5 April 2002. The payments by the company would be allowable against its profits as part of the employees' remuneration package and, unless a dispensation was in force, these amounts would be declared on forms P11D and the employees would be assessable to income tax on them. Against this, they could deduct an amount in respect of their business motoring costs, calculated by reference to business mileage and either their actual costs (the strict statutory basis) or the Revenue's published mileage rates.
As 'Ichi' notes, the previous statutory basis has been abolished from 6 April 2002 and the employees' claims must now be calculated by reference to its 'approved mileage allowance payment' rates (introduced by Finance Act 2001), currently 40p per mile for the first 10,000 miles and 25p per mile thereafter.
As intimated by 'Ichi', the company's position is more flexible (or, if you prefer, 'less clear'). If it pays a mileage rate at or below the total amount claimable by the employees, then there will be no income tax or Class 1 National Insurance liabilities on these payments and the employees can claim tax relief for any shortfall. If a higher level is paid, then an income tax and possibly a Class 1 National Insurance liability will arise on the excess or 'profit'.
At the present time, employers are able to reclaim the VAT on the fuel 'element' of mileage rates. 'Ichi's' thoughts on this subject seem closer to that of the European Court of Justice which, in European Commission v Kingdom of Netherlands, recently held that businesses should not reclaim the VAT incurred by their employees when purchasing fuel. This was on the basis that such expenses were not incurred by the business itself, nor did the business have a valid receipt. The Commission is awaiting the United Kingdom's proposals as to how it will bring its VAT legislation into line with this ruling, but pending this the VAT can still be reclaimed and any changes will not be retrospective. However, 'Ichi' should ensure that the necessary systems are in place to enable his new client to be able to prove to Customs, should the occasion arise, that only the VAT in respect of business purposes is being recovered.
We now move into possible changes to the current system and 'Ichi' should ensure that perceived tax/administrative advantages do not come before commercial considerations.
For VAT purposes, the employer must ensure that only the business proportion of the VAT relating to fuel for business motoring is reclaimed. This could be done either by restricting the VAT to the extent that it actually relates to business fuel or (possibly more convenient) by using the output tax fuel scale charges shown on page 16 of Customs Notice 700/64. Where a mileage rate is paid, the input tax is calculated by multiplying the fuel element of the allowance by the VAT fraction (7/47). The Revenue's 'fuel only' mileage rates (generally aimed for use where a business fuel allowance is paid to company car drivers) are accepted by Customs for these purposes.
Strangely, there is no 'private use' restriction when reclaiming the VAT relating to servicing costs, etc. which are allowable in full so long as the vehicle is used to some extent for business purposes (Notice 700/64, page 10).
Whether an income tax and National Insurance liability arises if an allowance is paid for all motoring will depend on the level of the mileage allowance paid. If the annual total exceeds the Revenue's limits above, then the 'profit' is subject to income tax. However, a Class 1 National Insurance liability will only arise if the total amount paid exceeds the rate for the first 10,000 miles (currently 40p per mile) multiplied by the number of business miles. It is understood that, originally, both the higher and lower rates were to apply as for income tax purposes but, following consultation, the higher limit only will apply until at least 6 April 2003.
In conclusion, the various options should be discussed with the employer. 'Ichi' should be careful not to paint his newly won client (and perhaps its employees) into an expensive corner. His suggestion that all of the employees' petrol costs should be paid, could result in a large financial commitment for the employer and tax and National Insurance liabilities for the employees. - Southern Man.
