Introduction
Mileage rates of 45p / 25p per mile have stood at the same amounts for over 12 years. Costs have increased significantly over this period, and particularly more recently with fuel costs.
The 45p and 25p per mile rates, set by H M Revenue & Customs, are not always sufficient to cover the cost of claiming for using your own personal vehicle for business travel. This is particularly the case after you have already incurred more than 10,000 business miles in the tax year and you are restricted to 25 pence per mile.
Company car ownership has significantly reduced due to the higher tax payable on the related benefits. Electric cars are still new and currently result in only a 2% of list price benefit in kind. This leaves many employers, with petrol and diesel cars, that must use the own personal car for business travel. Whilst employers may reimburse their staff for the mileage travelled, 45p / 25p is not really covering the costs anymore.
The H M Revenue & Customs guidance stated that if you pay rates that are higher than the 45p / 25p authorised mileage scheme rates and cannot show that your fuel cost per mile is higher than the 45p / 25p fixed rates then the excess paid over the fixed rates will be treated as taxable earnings.
Anything paid above the approved rates is tax deductible for the employer but is taxable on the employee and must be reported on Form P11D. Amounts paid at or below the AMAP rates do not have to be reported on Form P11D.
If an employer pays less than the approved rates, an employee can claim Income Tax relief from HMRC for the shortfall. This is done either through their annual Self-Assessment Tax Return or by completing Form P87. The amount being claimed can also affect which route an employee must use. A Tax Return must be completed where the employment expenses being claimed are more than £2,500 pa. Form P87 is ideal for small amounts of expenses or where an employee is not currently preparing a formal Tax Return.
Employee cars
Employees can use the approved mileage allowance payment (AMAP) rates, of 45p / 25p, where they use their own vehicle for business purposes. The fixed mileage rates are designed to cover the costs of fuel and wear and tear of the employee's own car when used for business trips.
The 25p rate applies to excess business miles over 10,000 miles driven in the tax year. The 45p / 25p rates apply to each employee for each tax year and not per employee's car per tax year. In other words, the employer does not need to monitor which car an employee is using, only their business mileage each tax year.
Employees who drive wholly electric cars can be paid an AMAP rate of 5p per mile; tax and NI free.
Company cars
If an employee is provided with a company car, they cannot use the AMAP rates. The AMAP rates are designed to cover the cost of the car, insurance, repairs and servicing, road tax etc, ... as well as fuel. As the employee is provided with the car and all other running costs, except for fuel, by the employer, then only the cost of fuel paid by an employee for business trip can be claimed / reimbursed to the employee.
However, instead of the 45p / 25p AMAP rates, an employee can be reimbursed for the cost of the fuel. HMRC provide regularly updated advisory fuel rates for business mileage in company cars. If the advisory fuel rates are not appropriate to cover the actual costs of employee fuel, e.g. lots of short trips, in traffic or a gas guzzler vehicle is used, then a calculated best estimate of the actual cost of fuel can be used instead.
Note the first letter 'A' in AMAP stands for HMRC 'approved'. i.e. a fixed rate; whereas the first word in advisory fuel rates is just that, advisory, with any sensible actual cost available to claim.
Mileage records
HMRC states that a mileage log should be kept and should show the:
date and purpose of the business trip
distance travelled
start and end address of each trip (including postcodes)
The AMAP rates can only be used for:
travel between a permanent workplace and a temporary work (e.g. visiting customer)
travelling between temporary workplaces
travelling between two workplaces in the same employment
travelling from home to another [temporary] workplace if the employee's home is their [permanent] workplace due to the requirements of the employment
Therefore, the AMAP rates cannot be used to claim mileage for 'ordinary commuting' which means your ordinary private mileage getting to and from work each day. Travelling to and from work is not mileage incurred 'in the performance of' the employment', but to 'put the employee in a position to perform their employment.'
Amounts paid up to the AMAP rates
Amounts paid under and up to the AMAP rates are tax free in the hands of employees. They do not need to be included through a payroll or on Form P11D.
Any shortfall paid to an employee can be included in an employee based tax claim to HMRC e.g. through a Self Assessment Tax Return or Form P87 'Tax relief for expenses of employment'. An income tax saving will arise at the employee's marginal rate of tax.
What H M Revenue & Customs say about paying over the AMAP
Mileage allowance payments paid in excess of the AMAP (approved mileage allowance payments) (of 45p / 25p) are subject to income tax via the payroll / P11D / Tax Return process and (employee and employer) National Insurance is paid through the RTI payroll process.
Say, an employee is paid 50p per mile by their employer in the tax year and does 15,000 business miles. They are paid £7,500 i.e. £0.50 x 15,000.
For Income Tax purposes, amounts paid to employees exceeding the appropriate 45p / 25p rates are taxed at the employee's marginal rates of Income Tax. The employee's allowance is £5,750 i.e. £0.45 x 10,000 + £0.25 x 5,000. £1,750 is taxable i.e. £7,500 - £5,750.
However, for National Insurance payment purposes, the 45p per mile rate is used for all excess business miles payments, not just the first 10,000 miles. National insurance, for both employee and employer, is due on the excess amount of £750 i.e. (£0.50 - £0.45) x 15,000 miles.
Reporting
Forms P11D are used to disclose to HMRC annual benefits in kind provided to employees, including excess AMAP rates. Form P11D is also provided to employees, after the end of the tax year, to help then complete their Self Assessment Tax Returns.
There is no mechanism on a Self Assessment Tax Return for National Insurance to be paid or collected on any payments paid in excess of the approved mileage allowance payment rates (45p / 25p).
In other words, whilst an employee may pay income tax on the excess amounts over the AMAP rates through the Tax Return, the National Insurance due on those earning cannot be collected by just entering the excess amount on their Tax Return. The employer must therefore ensure that they deal with the National Insurance amounts through the regular RTI payroll.
HMRC reporting confusion
What exactly does HMRC say about reporting and taxing amounts paid over the AMAP rates?
The excess amount paid over the AMAP rates is regarded as earnings for tax and National Insurance purposes this means that an income tax and Class 1 (employee and employer) National Insurance liability can only be collected through the payroll. For the avoidance of doubt, Class 1A (employer only) National Insurance, on benefit in kinds, is not applicable.
There is however, considerable confusion and contradiction, based on the legislative and HMRC’s own publications, exactly how the excess amount paid should be reported to HMRC.
Sometimes, HMRC suggest dealing with the excess through the payroll process, sometimes on a P11D, and sometimes a bit of both.
The Income Tax (Pay As You Earn) Regulations 2003, at Section 87(1)(d), states that the employer is required to submit the amounts on the P11D, but that doesn't actually mean that income tax and National Insurance is due.
HMRC’s guidance suggests that the excess amount should be reported on Form P11D, for income tax only, and through the payroll, for National Insurance purposes.
On Form P11D, at box E, it says ‘Enter the mileage allowances in excess of the exempt amounts only where you’ve not been able to tax this under PAYE.’
Working Sheet 6 for Form P11D states that ‘if you use this form to calculate a taxable amount for mileage payments you must also fill in a Form P11D unless you’ve taxed these expenses or benefits through your payroll.’
None of the applicable boxes on Form P11D for mileage payment, i.e. boxes E and N, relate to Class 1A National Insurance.
HMRC’s Booklet 480, on expenses and benefits in kind, is clearer. It states at 16.7 ‘If you pay more than the approved amount, the excess should be returned on form P11D, or payrolled if you’ve registered to payroll.’. At 16.8 it says ‘There’s a similar scheme for NICs, but the rules and rates for NICs are slightly different.’
What should be made extremely clear, despite HMRC’s confusion, is that an employer must deal with both income tax and a Class 1 National Insurance on any excess paid over the AMAP rates.
Can an employee claim more, but Income Tax and National insurance free?
The 45p / 25p AMAP rates per mile offer a simple and convenient method to save businesses a lot of administration and record-keeping in demonstrating their actual cost of fuel for each business journey.
However, in a response to a recent online petition to increase the approved mileage allowance payment rates, H M Revenue & Customs said that if the cost of business travel is higher than the fixed rates, you can use your own rates to reflect your situation. However, if an employer wishes to pay a higher amount, they must be prepared to keep full and detailed records, with calculations, to support that higher rate as being no more than necessary to fully reimburse the actual costs of the fuel used.
Therefore, you either pay at the fixed rates, of 45p / 25p per mile, or put in the work to calculate, and keep up to date, the real cost per journey and maintain suitable records of how these were calculated.
The 45p / 25p per mile rates are designed to cover the cost of fuel, general repairs, service and maintenance, depreciation, insurance etc on your private vehicle. However, if you wish to claim the actual fuel costs at a higher amount than the 45p / 25p per mile rates then you cannot make any additional claim to cover the general running costs of running the vehicle i.e. the non-fuel related costs.
Volunteer drivers only
Apparently, the ability to pay an employee at a rate in excess of the AMAP rates, with no tax or NI consequences, so long as evidence was kept of the actual costs should only have applied to volunteer drivers. A ministerial statement later clarified that this. To be clear, you should now not pay employees an amount in excess of the AMAP rates if you do not want to cause tax and NI to apply. Payments made above these rates would need to be reported on Form P11D, and the resultant Class 1A National Insurance.
My personal thought would be that if you can demonstrate additional actual costs for the non-fuel related costs of running the vehicle for business purposes then you could make a valid tax-free claim. However, this thought, unfortunately, does not accord with HMRC and the PAYE regulations.
What you certainly cannot do is claim a proportion of your fixed annual insurance or general running costs based, say, on the proportion of business to total mileage, and expect this to not be taxable on you personally. That is an arbitrary apportionment and does not reflect the actual additional costs of using the vehicle for business.
There may be an argument to say that the tyres on the vehicle, for example, with a considerable amount of motorway driving or consistent off-road driving that you can fairly accurately determine the cost per mile arising through general wear and tear on tyres. Therefore, if you know your vehicle tyres would typically last 30,000 miles and you do say 25,000 business miles each year then there may be an argument that you can accurately determine the cost of the tyres. However, if you are only doing say 500 business miles, I think it would be much more difficult to demonstrate the actual cost of the tyres consumed purely on business travel.
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