As a director or employee if you use your own car for business journeys your company can pay you a tax-free mileage allowance or you can claim an equivalent tax deduction. But is this still the case if you borrow someone else’s car?

Mileage allowance or deduction

You probably already know that if you own a car, motorcycle or bicycle and use it for business journeys you can be paid a tax and NI-free allowance by the business. Alternatively, if no allowance is paid to you, or it’s less than HMRC’s approved mileage rate, you can claim a tax deduction. The following examples show how this works.

Example 1. Jim is a director of Acom. He uses his privately owned car for business journeys. Acom pays Jim 45p per mile, which is HMRC’s approved rate (for annual mileage up to 10,000 per tax year). The payments are exempt from tax and NI. The rules prevent Jim from claiming a tax deduction for the actual car costs he incurs even if they exceed the mileage allowance he receives.

Tip. There is nothing to prevent Acom from paying Jim more than HMRC’s mileage rate, however the excess will be taxed as a benefit in kind and liable to Class 1 NI (employers’ and employees’).

Example 2. Acom paid Jim 30p per mile. This is tax and NI exempt as it’s less than HMRC’s approved rate. And, because it is the rules entitle Jim to a tax deduction of 15p per mile, i.e. the difference between HMRC’s rate and the payment he received.

Tip. If you’re the owner manager of a company and use your car (or other vehicle) for business journeys, the most tax and NI-efficient option for you and your company is for it to pay you the maximum approved mileage allowance allowed at HMRC’s rates rather than for you to claim an equivalent tax deduction.

No correlation to expenses

As we’ve already mentioned, the tax and NI-free mileage allowance or equivalent tax deduction can’t be increased to account for higher costs, but equally it is not decreased where your expenses are less. Neither do the rules require that you pay the running costs of the car (or other vehicle) for which the allowance is paid or deductions claimed. This means if you borrow a car from. say, your spouse or a friend, and use it for a qualifying business journey you are entitled to a mileage allowance or deduction.

Tip. The position is no different if you are temporarily using a hire car or one provided to you as a courtesy car by a garage or insurance company.

Paying for the use

Whether or not you compensate the person you borrowed the car from is between you and them and has no tax consequences for you and is unlikely to have any for them. There is however one exception.

Trap. If the car you borrow is provided to the other person by your company, you aren’t entitled to a mileage allowance and you cannot claim a tax deduction.

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.