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Company cars are fast becoming a rare phenomenon, mostly because they’re not very cost effective. Instead, most employees tend to use their own cars for journeys made on behalf of the business, then get reimbursed by their employer.
However, the big issue with this way of doing things is that all too often the arrangements for reimbursement result in unexpected tax liabilities.
Approved Mileage Allowances
This rule is pretty straightforward: the employee can be reimbursed for their business mileage in their own car at a rate of 40p per mile for the first 10,000 business miles in the tax year, then 25p for each consecutive mile. For motorcycles the rate is 24p per mile no matter how many miles travelled, and for bicycles, the rate is 20p per mile (even if the full distance travelled exceeds 10,000).
Using these rates is the only tax free way employers can reimburse their workers for business miles. If the employee chooses to be paid against petrol receipts, or gets a fixed sum each month instead, these payments are taxable, subject to the employee making a claim for tax relief based on the 40p/25p rates above.
This is topic in itself and could be explored beyond the depth of this article, but in a nutshell, travel between home and work doesn’t count as business mileage. Customer visits, travel to training courses, or delivery of goods, however, are all examples of business mileage.
It’s worth mentioning it may be worth seeking the help of an online accountant when it comes to working out your business miles.
Using More Than One Car
Mileage rates apply to the employee rather than the vehicle, so if they have more than one car or change their car during the year, the rate at which the employee can claim isn’t affected. The claim is for 40p per mile for the first 10,000 miles the employee travels, no matter which car they drive.
More Than One Job?
But what happens if the employee has more than one job? Providing the two employers aren’t associated with each other (i.e controlled by the same person), the 10,000 mile limit applies to each job separately. If the employers are in some way associated with each other there’s only one 10,000 mile limit covering associated employments.
Loans, Repairs, Etc.
The 40p per mile is for covering any and all costs involved with the employee running their car. Any additional payments from the employer will be taxable.
Mileage Allowance Relief
If the employer pays less than the mileage rates quoted above, the employee can claim the difference as a deduction from his income from the job. If he doesn’t normally submit a self-assessment return, he can make this claim after the end of the tax year on a form P87 – which can be downloaded from HMRC’s website (www.hmrc.gov.uk/forms/p87.pdf).
If any colleagues are transported in the employee’s car on a work journey, then the employee can be paid an extra 5p per passenger per mile free of tax. However, if the employer doesn’t make this extra payment to the employee, he cannot claim it as part of his Mileage Allowance Relief as described above.
Those who are self employed can also use the mileage rates to claim their business miles, as long as their annual turnover at the time they acquire the car they plan to use is below the VAT threshold, which is currently £68,000.
If their turnover exceeds that amount, they’ll have to work out the proportion of business miles to private miles and then allocate their total motoring costs accordingly. Using this method, they can also claim capital allowances on the cost of the car itself (again allocated for business and private mileage).
For those with turnovers below the VAT threshold, it might be beneficial to use the more formal method of claiming expenses, depending on the cost of their driving and the amount of business miles they travel.
Once they’ve chosen which method to use, they have to stick with it for as long as they use that particular car for business. When they change cars, they have the opportunity again to decide which method to use.
Again, at this point it can get a little confusing and self employed workers may want to employ contractor accountants, especially when it comes to filing your self-employed tax return.