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Besides paying salary to employees, businesses often pay their employees for several other expenses. These may be in the form of reimbursement of actual expense or payment of a fixed amount periodically. One of the most commonly paid for benefit is the cost of using own vehicle by employees for business purpose. The amount so paid has its own tax implications. HMRC has prescribed the treatment for such an expense while calculating the business’ tax liability.
Who is eligible to claim business mileage?
The following persons can claim the cost of using their vehicle for business purposes at approved mileage rates:
- Employees using their personal vehicle for visiting client’s place or for going on a business journey.
- Sole traders using their own vehicle for business purposes. However, if a capital allowance has been taken for the vehicle or expenses for which have been claimed from the business profits then business mileage allowance cannot be claimed for such a vehicle.
- Sole traders cannot claim a business mileage allowance for bikes/bicycles used for business purpose.
What is covered in approved mileage rates (AMR)?
The approved mileage rate covers any amount paid to the employee for expenses related to the use of a car, van, motorcycle or cycle by that employee for business travels. It also covers the cost of buying and running the vehicle. This means that you cannot claim for fuel, electricity, road tax, MOT and repairs separately.
Parking charges, road tolls and expenditure for train journeys can be claimed separately by both employees and sole traders.
The cost of commuting between home and business place shall not be covered by approved mileage rates. The amount received as reimbursement for this too and fro shall be considered to be additional
salary and the employer needs to deduct tax and national insurance contributions from the amount of reimbursement paid.
What amount can be claimed?
| Vehicle | Approved mileage rate per mile | ||||||||||||||||
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Note 1: Sole traders have a choice to claim for actual expenses instead of claiming vehicle expense as a simplified expense.
Note 2: The amount so calculated is the total allowable expense for the whole year irrespective of how many vehicles have been used}
Note 3: Is that too much to remember? We’ve got it sort for you. Click here to download our mileage claim calculator and all you need to do is just fill in the data and get the business mileage allowance for the period calculated automatically.
How can it be worked out?
To calculate the amount that can be claimed as vehicle expense- multiply the relevant business mileage rates with business miles travelled as per log kept. The resultant figure is the amount that can be claimed as a business expense. An easy way to calculate it is by using our mileage reimbursement excel template that can help you maintain and calculate the mileage expense allowable by simply putting in the number of miles travelled.
In an entity, it’s a good practice to have an expense claim system in place. This system would require the employees to put forward their claims by submitting a claim form periodically. This will help the business organisation to maintain proper records of business miles and related claims. This shall also serve as an authentic basis for calculating the allowable vehicle expense as per approved business mileage rates.
Example,
Business miles travelled by the employee in his/her own car in a year = 12,000 miles
Reimbursement to the employee at approved mileage rates
Taxable profit of employee is £50,000
Then,
The approved mileage allowance shall be (10,000 miles x 45p) + (2,000 miles x 25p) = £5000
So employee will be allowed a deduction of £5000 from his/her taxable profits. Hence he/she will be required to pay tax on £50,000 - £5,000 = £45,000.
Reporting requirement
For sole traders:
The sole traders need to simply include the amounts so calculated, in total for their expense in their self-assessment return.
For employees:
If employees are paid more than the amount calculated as per approved mileage rates, then:
- An employer needs to report the excess HMRC in form P11D or payrolled.
- Anything above the approved amount shall be added to the employees pay and taxed as usual
Example,
Business miles travelled by the employee in his/her own car in a year =10,000 miles
Reimbursement to employee @ 50p per mile
Then,
In such case the extra amount above the approved mileage allowance, i.e. 5p * 10,000 miles = £500 shall be reported in P11D
And this £500 will be added to the employee’s salary and taxed as usual.
If employees are paid less than the amount calculated as per approved mileage rates, then:
- No need to report HMRC about it.
- An employee will be entitled to tax relief (called Mileage Allowance Relief, or MAR) on the unused balance of the approved amount. If the amount claimed under MAR is less than £2,500 then the employee shall fill P87 to claim it. If the amount claimed under MAR is more than £2,500 then the employee needs to file self-assessment return to claim it.
- An employer can make separate optional reports to HMRC of any such unused balances under a scheme called the Mileage Allowance Relief Optional Reporting Scheme (MARORS).
Example,
Business miles travelled by the employee in his/her own car in a year = 10,000 miles
Reimbursement to employee @ 35p per mile
Then,
Employee can claim 10p (45p-35p) per mile. In other words, he/she can claim £1,000 from his/her
taxable profits for the year. This £1,000 is called mileage allowance relief.
Passenger payments to employees
If an employee carries another passenger on his/her vehicle while on a business trip, then the employer may choose to pay him/her up to 5p per mile tax-free. This is known as passenger allowance. This amount shall be in addition to the approved mileage allowance. Also, there isn’t any need to report HMRC about this payment if it is paid at approved rates (i.e. 5p currently). If the amount paid for passenger payments is more than the approved rate then the excess needs to be reported in P11D or payrolling benefits in kind needs to be used. Nothing needs to be reported and no relief can be claimed if the amount paid as passenger payments is less than the approved rates. Another thing worth noting here is that there isn’t any provision of tax relief (unlike Mileage allowance Relief) where the employee carries another passenger and isn’t compensated.
National Insurance
If the amount paid for mileage allowance does not exceed the approved limits then no national insurance will be due. If the amount paid is more than approved rates then Class 1 national insurance may be due on the excess at the time of payment. For NICs, the scheme uses the higher or highest of HMRC’s approved rates which is currently 45p per mile, for all business miles.
Record Keeping
Employers should ensure that adequate records to demonstrate that payments satisfy the conditions for exemption are kept. Further following records need to be maintained:
- Miles travelled for business purpose
- A log of every journey-that shows details like date of journey and from and to places
These records need to be kept for at least 3 years.”
Conclusion:
The understanding of business’s approved mileage allowance enable employers, employees and sole traders to calculate, claim and report (if needed) the right amount of vehicle expense. It is a simple concept and we’ve made it all the simpler for you by creating a ready to use business mileage book. Just put in the details and voila! The allowable expenses get calculated automatically.
