Using you own vehicle for work

This is the title of the new Revenue booklet IR124 that explains the changed tax and NICs rules on business mileage allowance payments to employees who use their car, van, motorcycle or bicycle for business travel. It describes the concept of Authorised Mileage Allowance Payments (AMAPs), the way in which employers will calculate any tax and NICs liabilities, and the rules for claiming tax relief. A copy of the booklet should be given to every employee who is affected by the new rules.

Guidance for employers appeared in issues 208 and 215 of Payroll Briefing. In particular, employers who have, until now, paid lump sum payments to essential users through the payroll, in order to deduct both tax and NICs, are reminded that this procedure is no longer necessary from April 2002. All payments in respect of the private use of employees' vehicles, whether in the form of lump sum payments or mileage allowances, should be aggregated annually in order to check any reportable tax benefit on forms P9D and P11D, and in each earnings period in order to determine any NICs liability through the payroll. In both cases, any liabilities are only on any excess over and above the AMAP maximum for the year (for tax) or earnings period (for NICs). See also pages 84 to 86 in the CWG2 Further Guide for 2002.
Payroll Briefing 222 - 24 April 2002

Class 1 NICs

Issue 208 of Payroll Briefing explained the Revenue's plans to change the way in which Class 1 NICs will be calculated on the new Approved Mileage Allowance Payments (AMAPs), which will replace the Authorised Mileage Rates for business travel in private vehicles from April 2002. The proposal would have increased the level of work required of employers with employees who travel more than 10,000 miles each year in their own vehicles. It would also have increased the likelihood of employees having to pay Class 1 NICs on the mileage payments each month, even though there was no tax liability on the payments at the year-end.

After a period of consultation, the Revenue has decided not to implement its proposals but to maintain the status quo. This was the recommendation made by Payroll Briefing, in issue 208. Although the statutory 40p rate for the first 10,000 miles and 25p thereafter will apply for tax purposes, only the 40p rate will be used to determine profit for Class 1 NICs, even if annual business mileage exceeds 10,000 miles. This will help employers who use a single mileage rate somewhere between 25p and 40p.

In addition, any liability for Class 1 NICs will be based on the definition of business mileage set out in the Revenue's 490 Employee Travel guide, not on the number of miles paid by the employer where that is less than the statutory definition. This will help employers that pay a rate that is higher than 40p but for a limited number of business miles. However, it does mean that they will have to keep records of (1) the mileage actually paid, and (2) the business mileage according to the Revenue's rules.

For example, an employer pays a flat rate of 45p a mile to employees who their own cars for business travel. The payment is limited however to mileage calculated according to the "triangular travel" rules, i.e. the lesser of the mileage between (1) home and the temporary workplace, and (2) the permanent workplace and the temporary workplace. A monthly-paid employee travels 12,000 business miles in a year according to the statutory definition of business travel, but only 9,600 miles according to the triangular travel rules. The mileage payment each month is £;360 (i.e. 700 miles @ 45p), totalling £;4320 for the tax year.

For tax purposes, the total amount of expenses paid in the year are compared with £;4500, the total amount of tax relief available according to the Revenue's rules, i.e. 10,000 miles @ 40p plus 2,000 miles @ 25p. The actual payment is less, so the employee can claim tax relief on the difference.

For NICs purposes, the calculation is similar, but done for each monthly earnings period. The amount that may be paid monthly without any Class 1 NICs charge, assuming 1,000 business miles are travelled each month, is £;400, i.e. 1,000 miles @ 40p. As the payment is £;360 (i.e. 700 miles @ 45p), there is no profit for the employee and therefore no NICs to pay. This is true even in the last two months of the year when the total business mileage exceeds the 10,000 mile threshold. Even though the statutory rate drops to 25p for tax purposes, it continues at 40p for NICs purposes.

Note that, to avoid both a tax and NICs liability on the payments from April 2002, the employee will have to report (1) the business mileage that will be paid according to the employer's expenses policy, and (2) the actual business mileage travelled. Employers in this situation need to review their expenses claim forms in order to obtain the two sets of business mileage figures.

There are two other situations where the new rules may give some employers a problem. The first is where, under the employer's travel policy, the number of business miles paid is calculated by deducting (1) the mileage between the employee's home and permanent workplace from (2) the mileage between the employee's home and temporary workplace. If the mileage travelled on a business journey is less than the employee's normal commuting journey, the employee will not make an expenses claim in respect of that journey. As a result, the employer may not know about the journey at all and, as a result, does not take those business miles into consideration when determining any profit for NICs purposes. Such employers may need to find a way of reporting all business miles travelled, even where no payment is made.

A further problem area is lump sum payments. A strict interpretation of NI Regulations is that a lump sum allowance made to an "essential user", in advance of the business use for which the payment is made, is really earnings and therefore subject to NICs in full in the earnings period in which it is paid. In practice, however, the Revenue allows such lump sums to be offset against the mileage for which mileage payments are made in any particular earnings period. The new Regulations will provide a statutory basis for handling lump sums in this way. Any profit to an employee from such a lump sum will vary according to the number of business miles for which the mileage allowances are paid. Taking an extreme case, if a lump sum is paid in a particular earnings period but no mileage allowances, the whole of the lump sum payment will be liable to Class 1 NICs.

The Revenue's new rules for determining NICs liabilities on mileage payments are subject to final drafting Parliamentary approval.

Dispensations

When the new statutory mileage payments come into effect in April 2002, employers will be required to report only any profit for tax purposes on forms P9D and P11D at the year-end. As a result, any current dispensations for mileage payments will cease to have effect. However, recognising that some mileage payments for business travel during the 2001/02 tax year will be paid early in the 2002/03 tax, and that those payments may be higher than the 40p statutory limit for 2002/03, the Revenue is allowing existing dispensations to apply to such payments so that they are treated as if they were paid during the 2001/02 tax year.

For example, under the authorised mileage rates for 2001/02, an employer may pay 63p per mile for a car with a 2.5 litre engine. The payment is not reported because it falls within the terms of a dispensation in force for 2001/02. The payment for business miles travelled in March 2002 may not be paid to the employee until the end of April, at which time the statutory maximum will be 40p per mile. Under the transitional arrangements, that payment will be covered under the dispensation and will not have to be reported in either the 2001/02 or 2002/02 tax years. The mileage involved will not count towards the 10,000-mile threshold for 2002/03.

In order to take advantage of these transitional arrangements, the employer must:

• have a dispensation for 2001/02 to cover mileage expenses payments made at rates that do not exceed the Inland Revenue's
authorised mileage rates for 2001/02
• adjust its mileage expenses reimbursement scheme for all business travel in 2002/03, and set the new rates of payment at levels
that will be free of tax and NICs under the new rules for mileage allowance payments.
• have agreed with employees that reimbursements for business travel during 2001/02 will be paid at the reimbursement rates that
were in force in 2001/02, even where the payments are made after 5 April 2002.
• make payments for business travel carried out in 2001/02 no later than 31 May 2002.

Company cars

There is no fuel scale charge for the provision of a company car where employers reimburse no more than the cost of the fuel for business mileage. It is difficult to establish fuel-only mileage rates because the per-mile cost of fuel varies according to the fuel and the fuel consumption of each car, and such rates have to be constantly reviewed to ensure employees do not enjoy any profit from the payments. However, employers may negotiate a dispensation with their tax office that defines average fuel-only mileage rates that will be treated by the Revenue as not creating a profit to the employees receiving them.

To assist employers in negotiating suitable rates for inclusion in a dispensation, the Revenue has published some guideline figures, based on the cost per mile of the 20 most popular fleet cars. They are, however, advisory rates and, if an employer can make a good case for paying higher rates for particular types of car, that would not prevent agreement on a dispensation.

The advisory rates are as follows:

1400cc or less

10p

Reimbursement of mileage in private vehicles

The Authorised Mileage Rates that are currently used to determine tax and NICs liabilities for payments made to employees who use their own vehicles on business journeys will be replaced, from April 2002 by a simple statutory scheme, called Approved Mileage Allowance Payments (AMAPs). This new scheme has been considered in some detail in Payroll Briefing issues 197 and 202. The consultation paper and draft Regulations about the NICs liabilities was explained in issue 208.

The rates that may be paid without any tax or NICs liability are:

The 10,000 mile annual limit applies across all employments that an employee may have with the same employer, or associated employer.

Tax relief will be available if:

1) payments are made only in respect of business mileage in the employee's own vehicle, and
2) the total amount paid in a tax year does not exceed the total number of business miles multiplied by the appropriate mileage rate.

Payments that meet the two criteria will have no tax liability and will be known as AMAPs. AMAPs do not have to be reported on form P11D at the year-end and dispensations will no longer be needed. Entries will only be required on forms P11D and P9D where the total annual payments exceed the maximum tax-free amount allowable for the business mileage, and the amount reported will be the excess over the maximum.

As the two reporting schemes, the Fixed Profit Car Scheme (FPCS) and the Car Allowance Enhanced Reporting Scheme (CAERS), will be scrapped from April 2002, the only way of reporting a taxable "profit" will be on the P11D and P9D forms. However, a new reporting scheme will take effect from April 2002 that will enable employers to report mileage rate payments that are lower than the statutory rates and allow the Revenue to grant the tax relief without employees having to claim it. It will be called the Mileage Allowance Relief Optional Reporting Scheme (MARORS).

The position regarding NICs has yet to be confirmed and depends on the outcome of the current consultation exercise. (See Payroll Briefing issue 208) - Payroll Briefing 210 - 11 October 2001