Ray Chidell of Mazars Neville Russell provides TaxZone readers with the latest in his series of bulletins on employer-related tax issues. Ray is author of the P11D Handbook and the abg book on company cars. He offers employers a free, regular e-mailed tax advice bulletin, Employer Tax Update (ETU).

To get on the mailing list for his free bulletins, simply send an e-mail note of your name and company to ETU@mazars-nr.co.uk

Basics
Employers may, from 6 April 2002, reimburse up to 40p per business mile driven in a privately-owned car, without causing the director or employee concerned to incur a tax or NIC charge. This rate applies for the first 10,000 business miles in any given tax year. Any additional business mileage may be reimbursed at a lower rate of 25p per mile.

Example
In the tax year ending on 5 April 2003, Beryl covers 12,000 business miles. Her employer can reimburse her as follows without incurring a tax charge for her:

10,000 miles @ 40p per mile £4,000
2,000 miles @ 25p per mile £500

In total, she can receive £4,500 tax-free from her employer.

In a change from the rules that have applied before April 2002, this will be the only way in which an employee may now be reimbursed tax-free for business mileage. The Fixed Profit Car Scheme ceases to apply. The employee is not entitled to claim capital allowances in respect of the car. He or she does not have the option to claim on the basis of actual expenditure incurred. No tax relief is due for any interest costs incurred in buying the car in the first place. No dispensation is required for payments made at or below the approved rates.

Multiple employments
If an individual has more than one employment he may have more than one amount of 10,000 miles that can be paid at the higher rate. This will be exceptional, however, as associated employments have to be treated as one for these purposes.

Employments are associated with one another if any of the following applies:

• the employer is the same; or
• the employers are ‘partnerships or bodies’ under the common control of an individual or of another partnership or body; or
• the employers are associated companies (as defined).

More than one car
If an employee, working for a single employer, has more than one privately-owned car (or van, or combination of cars and vans) used for the business then there is still only one amount of 10,000 miles for which reimbursement can be made at 40p per mile.

Passenger payments
To encourage car-sharing, it is also now possible for an employer to make a tax-free top-up payment where the driver has others travelling in the car on the same journey. The additional payment can only be made in relation to passengers who are also employees (not, for example, clients) of the same employer and for whom the travel is business travel. The approved amount is 5p per qualifying passenger per business mile.

Example
Beryl (from the first example above) is employed by a professional partnership. In the year, she has a fellow employee with her on business journeys totalling exactly 1,000 miles. She also drives one of the partners for 200 business miles.

Beryl can be reimbursed an additional £50 tax-free (1,000 miles @ 5p per mile); not 1200 miles, as the partner is not an employee. If the partner had instead been a further employee then the amount that could be reimbursed tax-free would have risen from £50 to £60 (1,200 miles @ 5p per mile).

There is no limit on the number of employees for whom passenger payments can be made in this way, as long as the journey constitutes business mileage for them. It is not relevant whether different employees are taken at the same time or consecutively – what matters is the number of passenger business miles travelled in the year.

Insurance risk
In the Employer’s Bulletin of September/October 2001, the Revenue warned of a possible insurance complication where passenger payments are made: ‘It’s a good idea to advise your employees to check with their insurance provider that the new approved mileage system does not create a problem with their policy. This is especially important where you choose to pay a passenger rate of up to 5p per mile to encourage car sharing on business journeys. Drivers of smaller cars receiving 40p a mile will need to check that the insurance company is satisfied that no profit or reward is involved and their insurance remains valid.’

This possible risk has received very little publicity!

Excessive payments
There is nothing in the legislation to stop employers paying higher rates per mile; for example, some employers may choose to reimburse 40p for every business mile even to employees who cover more than 10,000 miles. Any excess over the approved amount, however, is taxable.

Lower payments – mileage allowance relief
Just as some employers will pay more than the approved rates, so others will pay less. In this case, an employee can claim tax relief on any shortfall compared with the approved amount of mileage allowance payments.

A few employers will not reimburse any business mileage. Tax relief can then be claimed on the full amount that could have been reimbursed using the approved amounts.

Tax relief on any shortfall does not, however, apply to passenger payments where the employer chooses not to make such payments; no relief may be claimed for passenger mileage payments that are not made. This produces some opportunities for planning.

Example
Jack drives 8,000 business miles and has a qualifying passenger for 5,000 of those miles. Jack’s employer is entitled to pay up to £3,450 tax-free, calculated as 8,000 miles at 40ppm (£3,200) plus 5,000 miles at 5ppm (£250).

Suppose, however, that his employer reimburses only £3,200. If this is all expressed as being approved mileage allowance payments, with no passenger payments, then there is no tax liability but the employee cannot claim tax relief on the shortfall of £250. If, on the other hand, the employer states that he is paying £250 as a passenger payment and a reduced amount of £2,950 as the approved mileage payment, the employee can now claim tax relief on the shortfall of £250, saving up to £100 in tax.

Further information
For any further advice or assistance in relation to employer tax issues, please contact Ray Chidell on 01273 206788 (email: ray.chidell@mazars-nr.co.uk), or your usual contact at Mazars Neville Russell if you have one.

Disclaimer
The update is provided without charge and no responsibility can be accepted for action taken or not taken as a result of its contents. Formal advice will be provided on request under terms that will be agreed in advance.

Company car book
The above is adapted from Company Cars published by ABG Professional Information. The second edition of this book is published next month and can be ordered from the publishers on 020 7920 8991.

See Ray’s previous bulletins on such matters as employee medical expenses, the choice between van or car, payments in lieu of notice, employee clothing, employee contributions to company cars, tax-free benefits, FPCS, employment status, P11Ds, PAYE Settlement Agreements, Class 1A National Insurance, Company car issues, loans to employees, Christmas parties, and many more.

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