Top tips: getting business mileage right on your tax returns

The AAT suggests that reporting mileage records correctly is one of the most difficult problems related to business mileage expenses so getting this right should be paramount for every finance department, says Nigel Morris, senior manager and head of fleet car consulting at PwC

What is a business mile?

Getting the answer to this wrong can lead to additional tax and national insurance (NIC) bills for employers and drivers based on either the ‘excess’ mileage reimbursed, or the full annual fuel scale charge (currently £21,700 multiplied by the tax % related to the CO2 emissions of the car)

In addition HMRC will seek interest and maybe even penalties. In the very rare extreme case this could be a penalty of up to £3,000 per incorrect P11D per driver per year.

So, how real is this issue?

An example of how serious this can be is highlighted in the Impact Foiling Case. The problem was that when an HMRC inspection took place, there were no adequate records of business or private mileage and therefore the company could not say that it had not provided £1’s of free fuel to the directors. The Commissioners decided in favour of HMRC and said it was too late to repay the fuel provided.

Business mileage is travel that an individual is necessarily obliged to undertake in the performance of their duties. A typical example might be where an employee has to travel directly from their ‘normal workplace’ to a client, supplier or professional advisor etc. A normal workplace is a place that a person regularly attends – where people would expect to be able to leave a message for the person etc.

Another example of business mileage is where an employee travels directly between home and a ‘temporary workplace’. 

Business mileage does not include:

  • Travel from home to a normal place of work (ordinary commuting).
  • Private travel – non work-related journeys. 
  • Travel from home to a location near your normal place of work (as a guide, within 10 miles of your base).

It makes no difference if the journey takes place outside normal working hours. This includes an employee driving to their normal place of work in response to a call out eg, to settle an alarm call in the middle of the night.

Please note the following:

  • To get relief for the cost of travel, an employee’s attendance at a temporary workplace has to be necessary in the sense that it is dictated by the requirements of the duties of the employment and not, in anyway, by the personal convenience of the employee.
  • An employer cannot turn an ordinary commuting journey into a business journey by requiring an employee to stop off on the way to carry out business tasks such as making telephone calls. Any journey between an employee’s permanent workplace and home, or any other place where the employee’s attendance is not necessary for the duties of that employment, is ordinary commuting.

The question you need to answer then is are you insisting on, and getting, adequate expense claims and/or business mileage logs from drivers?

Business mileage expenses

Implementing a robust and accurate system still seems to create a lot of problems for employers and getting this wrong can prove very expensive when HMRC carry out a review. Reimbursing ANY business mileage expenses in excess of the cost incurred may result in an income tax and NIC’s liability. 

Of even more concern is if an employer reimburses the cost of non business or private mileage

in a company car which could result in expensive company car fuel benefits being imposed by HMRC.

Then there is the interest and penalties that could be added to the bill.

HMRC will look to establish that the claims made do no more than reimburse the cost incurred for genuine business travel.

However, in order to prove that claims do this, drivers will need to record on each claim for each trip:

  • Journey date
  • Where the journey commenced (detailed location/post code)
  • The place/companies visited
  • Where the journey ends (detailed location/post code)
  • The start and closing mileage
  • Total business mileage

Tax relief for business travel

HMRCs view is that it is not sufficient to show private mileage only, as this cannot be checked.

Tax relief is allowed by deduction from the employees emoluments, which includes expenses. Since the changes to legislation introduced in 1998 tax relief is available in two circumstances.

Firstly, tax relief is allowed for travel in the performance of the duties of the employment.

Secondly, tax relief is allowed for travelling to or from a place in the performance of the duties as holder of the employment and the expenses are attributable to the employee’s necessary attendance at any place in the performance of the duties of the employment. 

Tax relief is not available for travel between home and the normal or permanent place of work; normally regarded as ordinary commuting. What does ordinary commuting mean? Well it means travel between the employee’s home and a permanent workplace or between a place that is not a workplace for example a holiday home and a permanent workplace.

The tax relief on business mileage reimbursement is dependent on whose car is being used for the business journey. If an employer reimburses an amount in excess of the authorised or statutory rates the excess should be reported on Form P11D Return of Expense Payments and Benefits.

The authorised rates (AMAP) for business mileage reimbursement in cars and vans is 45p per mile for the first 10,000 business miles, then 25p per mile for any business miles in excess of 10,000 in the tax year.

Employers using the authorised rates do however need to monitor the amount of business miles claimed at the full 45p rate in order to reduce the rate of reimbursement to 25p per business mile after 10,000 business miles. If an employer reimburses all mileage including amounts over 10,000 business miles at the higher 45p rate there will an income tax charge on the excess, but not NIC!

There are no authorised or statutory rates of reimbursement for company cars but HMRC publishes rates in the form of its advisory fuel rates (AFR) for business mileage reimbursement for company car drivers. HMRC recommends the use of these published rates when employers either reimburse employees for business travel in their company cars or when employers recover from employees the cost of any private fuel provided by the employer and used for private travelling. HMRC reviews the rates quarterly and publishes the changes on its website.

Things to look out for

  1. Lack of detail. The levels of reimbursement can be fair or even generous, but Employer’s must be able to check the accuracy of the claims in full and so must HMRC, so you may need to know the post code of where ‘Home’ is etc.
  2. HMRC considers mileage claims ending in 0 or 5 to be rounded claims and will challenge them.
  3. Employees may be prone to exaggerate mileage claims if they think that the rate of reimbursement is too low.
  4. Another common problem are employees who claim to do little or no private mileage when it comes to reimbursing the employer. Sometimes monthly claims show little (10 or 100 miles) or no mileage and an employer must know that this is accurate.
  5. Full electric cars raise questions as there are no AFR rates and under the legislation electricity is not a fuel that carries a benefit in kind (BIK) charge.

Conclusion

Expenses have become even more of a hot topic over the last few years, partly because of the scandal of some of the claims of our MP’s. But let us not forget that HMRC employer compliance officers always have and probably always will see this issue as a high risk one with scope for recovering sometimes substantial settlements, especially when company cars are involved and fuel scale charges may be imposed. The rules are strict and often difficult to understand for employees and so it is vital to keep on top of this.

Maintaining robust policies, systems and processes is essential and recent improvements in innovative and GPS technology can aid the maintenance of accurate records in a fraction of the time taken to complete ‘traditional’ records. Finding solutions where the driver is in control of the data and so ‘Big Brother’ issues associated with off the shelf telematics solutions is also managed can be achieved.  

About the author

Nigel Morris is a senior manager and head of the Fleet Car Consulting Team at PwC

Nigel Morris |Motor sector specialist tax director, MHA MacIntyre Hudson senior manager and head of the PwC Fleet Car Consulting Team at PwC - See more at: https://www.accountancylive.com/getting-business-mileage-right#sthash.CD...

Nigel Morris is motor sector specialist tax director at MHA MacIntyre Hudson. His are...

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