HMRC’s rules allow you to pay your employees a tax and NI-free mileage allowance for business journeys they make using their own vehicles. What’s more, there’s a loophole which means that they might be entitled to extra tax relief on top. When does it apply and what’s it worth?
Mileage allowances
As you probably know, employees can receive a mileage allowance for using their personal vehicle for business travel tax and NI free, if the amount is no more than HMRC’s approved mileage rates (AMRs). A well publicised situation where an employee is entitled to additional tax relief is where the mileage allowance received is less than the AMR.
Example. Chris’s workplace is his firm’s HQ but once or twice a week on average he has to travel to customers, suppliers, attend conferences, etc. His firm pays him a mileage allowance of 40p per mile (the AMR for Chris’s journeys is 45p) as Chris uses his own car for these journeys. Last tax year he travelled 3,000 miles and received a mileage allowance of £1,200. The AMR amount for 3,000 miles is £1,350, therefore Chris can claim a £150 tax deduction for the difference.
Qualifying mileage
A less obvious and often overlooked scenario where further tax relief is due occurs where the amount of mileage qualifying for AMR is greater than that which an employer pays. This typically occurs where the starting or end point of a business journey is not an employee’s normal place of work, e.g. their home. Consider Chris from our example. He often starts or ends his journey from home rather than his firm’s HQ. When this happens Chris’s firm pays him the AMR for the number of miles between his normal workplace (HQ) and the customer etc. but not for the additional miles he racks up because his journey starts or ends at home.
Example. Chris commutes to work in his car as usual but has an appointment late in the afternoon to visit a customer located nine miles away from his normal workplace. The visit ends after Chris’s normal working hours and so he drives directly home instead of returning to his office. His journey home is 36 miles. His firm pays him the AMR for 18 miles, i.e. the mileage between the office and back. However, the good news for Chris is that HMRC’s rules allow him to claim a tax deduction for the whole of his journey between the customer and his home. That’s another 18 miles at 45p per mile (£8 in total). Not much by itself, but as Chris makes 40 such journeys a year the extra AMRs add up to £320. The position would be similar if Chris had to meet the customer early in the day which required him to start his journey from home, or if it started and ended at home. Chris can claim the extra tax relief he overlooked for the current year and the previous four.
Tip. The extra mileage qualifies for a tax deduction at the AMRs. As a rule of thumb, extra tax relief is due for where the mileage covered on a business journey is greater than the employee’s normal commute and they have not received an AMR payment for the extra miles.
Genuine business journeys
To qualify for AMR payments the travel must be necessary so that an employee can carry out the duties of their job. Inserting a stop-off which doesn’t have a material and genuine business purpose in what would otherwise be an employee’s normal commute can’t turn it into a qualifying journey.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.