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The current rules for handling the tax liabilities on mileage allowance payments came into force on 6 April 2002. The new P11D reporting procedures were first used following the end of the 2002/03 tax year.
In November 2002, the Inland Revenue confirmed in a letter to the author that the new rules for handling mileage allowance payments were to be applied on a "tax year" basis, i.e. that the business mileage travelled in the tax year is used to determine the approved amount, and that the total of the payments in the tax year are to be compared with the approved amount.
In April 2005, following an enquiry by the author about different guidance having been provided to a colleague, the Inland Revenue apologised for the earlier guidance and advised that the rules for handling mileage allowance payments should be applied on a "like for like" basis, i.e. that the business mileage travelled in the tax year is used to determine the approved amount, but the total of the payments made in respect of those business miles are to be compared with the approved amount.
The "tax year" approach means that payments made to an employee between 6 April in one year and 5 April in the following year (inclusive) are taken into consideration. The effect is that the number of business miles used to determine the approved amount will usually be different from the number of business miles for which payment has been made. There will usually be an amount for the employer to report on form P11D or an amount on which the employee can claim mileage allowance relief.
The "like for like" approach means that payments made at the start of the tax year in question that relate to business travel in the previous tax year must be excluded, and that payments made at the start of the following tax year that relate to business travel in the tax year in question must be included.
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Example: An employee submits mileage allowance claims on the 16th of each month, for payment at the end of that month. Claims are made for the business miles travelled between the 16th of one month and the 15th of the next month. The mileage rate is 40p for all business miles.
- The expenses claim form and supporting mileage log provided by the employee on 16 April 2005 show that
- between 16 March and 15 April, 800 miles were travelled on business, for which £;320 is paid at the end of April 2005
- between 6 April and 15 April, 200 miles were travelled on business, for which £;80 is paid, included in the £;320 paid at the end of April 2005.
- The expenses claim forms and mileage logs for the next eleven months show that between 16 April 2005 and 15 March 2006, 8,800 miles were travelled on business, for which £;3,520 is paid at the end of the months May 2005 to March 2006.
- The expenses claim form and mileage log provided on 16 April 2006 show that
- between 16 March and 15 April, 1000 miles were travelled on business, for which £;400 is paid at the end of April 2006
- between 16 March and 5 April, 400 miles were travelled on business, for which £;160 is paid, included in the £;400 paid at the end of April 2006.
"Tax year" approach
The business miles travelled in the tax year are 9,400 (i.e. 200 + 8800 + 400), for which the approved amount is £;3,760. The mileage allowance payments made to the employee in the tax year, i.e. at the end of the months April 2005 to March 2006, amount to £;3,840 (i.e. £;320 + £;3520). The £;80 by which the actual payments exceed the approved amount are reported on form P11D. Different business miles travelled at the start and end of the tax year could as easily have created a situation where the employee would be able to claim mileage allowance relief.
"Like for like" approach
The business miles travelled in the tax year are 9,400, for which the approved amount is £;3,760. The mileage allowance payments made for those 9,400 miles amount to £;3,760, (i.e. £;80 + £;3520 + £;160). The total of the payments made is the same as the approved amount so there is nothing to report.
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The author has no preference for one or other of these approaches. Both methods involve a lot of work for employers, pulling figures out of 12 or 13 months of expenses claims. The issue for the author has only to do with the interpretation of the legislation, as explained below. The "like for like" example above shows that, where the employer pays 40p per mile, the approved amount and the total payments will always be the same. The approach does not have that effect, however, if the employer makes any other kinds of mileage payments, such as essential user allowances or one-off payments. And mileage allowance relief situations also arise if the employer pays lower rates or does not pay for all business mileage.
That the "tax year" approach was originally intended is confirmed by the calculation procedure set out in the P11D Working Sheet 6, introduced for use at the end of the 2002/03 tax year. For the three years that the form has been used, the very first step in checking whether there are any excess mileage allowance payments to report is to determine the mileage allowance payments made to employees in the tax year. Subsequent steps involve the calculation of the approved amount for the year, based on the total business mileage for the tax year.
At some point, therefore, since the legislation came into force in April 2002, HMRC has begun to interpret the legislation in a different manner to that confirmed in November 2002 and still used on the P11D Working Sheet. In contrast, those employers who use P11D Working Sheet 6, including its electronic version on the annual CD-ROM, have been performing the calculations using the "tax year" approach since the end of the 2002/03 tax year.
The latest correspondence from HMRC on the subject indicates that the P11D Working Sheet 6 is to be changed so that it uses the "like for like" method for the end of the 2005/06 tax year.
The legislation
Section 230(1) of ITEPA says:
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"The approved amount for mileage allowance payments that is applicable to a kind of vehicle is -
M × R
where -
M is the number of miles of business travel by the employee (other than as a passenger) using that kind of vehicle in the tax year in question;
R is the rate applicable to that kind of vehicle."
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The "approved amount" is based on the number of miles of business travel "in the tax year in question". For this reason, when checking to see if there is anything to report on form P11D, the employer must check expenses claim forms or business mileage logs to determine the exact business mileage traveled between the first and last day of the tax year, inclusive.
Note, however, the wording of section 229(3) of ITEPA:
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"Mileage allowance payments are approved if, or to the extent that, for a tax year, the total amount of all such payments made to the employee for the kind of vehicle in question does not exceed the approved amount for such payments applicable to that kind of vehicle (see section 230)."
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This text uses the words "for a tax year" - different from "in the tax year", as used in section 230. What is the significance of this difference?
Note how HMRC's Employment Income Manual, at page EIM31230, explains the significance. The following words relate to the section 230(1) definition of "approved payment".
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"Note that the period covered is the tax year itself, so the figure used in the calculation is the actual business mileage in the tax year, not (for instance) the mileage on claim forms submitted in the tax year. The AMAPs amount calculated from the actual business mileage in the year is then compared to MAPs made for that mileage (i.e. for the year), whether they are made in the same tax year or shortly afterwards for administrative reasons."
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This correctly states that the "approved payment" is based on the actual business mileage in the tax year. The phrase "for the year" is then used to explain that, when the actual mileage payments are compared with the approved payment, it is the payments made for (i.e. in respect of) the actual business mileage in the tax year that are used, even if some of the payments are made outside of the tax year. Put another way, this explanation uses a "like for like" approach - the payments made for the business mileage must use the same business mileage that is used to calculate the approved payment.
However, that is not what section 229(3) says. The phrase "for a tax year" is not linked with the payments made to the employee. If that were intended, it would have to say
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"Mileage allowance payments are approved if, or to the extent that, the total amount of all such payments made to the employee for a tax year for the kind of vehicle in question does not exceed the approved amount for such payments applicable to that kind of vehicle (see section 230)."
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If that were indeed the wording, HMRC's explanation in the Employment Income Manual would be correct. It would not matter when the payments were made, only that they were made for, or in respect of, the actual business mileage in the tax year.
It is useful to compare the wording of section 229(3) with that used in section 175, where one of the conditions for a loan being a taxable cheap loan is that:
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"no interest is paid on it for that year, or the amount of interest paid on it for that year is less than the interest that would have been payable at the official rate"
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This wording clearly refers to interest paid after the end of the tax year but in respect of the tax year.
However, in section 229(3), the phrase "for a tax year" is linked to the comparison that is made between the total mileage payments and the approved amount. The location of the phrase in the sentence is precise. Approval of the payments depends on whether or not, for the tax year, the total mileage payments exceed the approved amount.
Consequently, it is the total of the mileage payments made in the tax year that must be used for the comparison with the approved amount. Only in that case can the comparison be said to be for the tax year. It would also correspond with the normal expenses principle, namely that a payment is treated as earnings "for the tax year in which expenses are paid or paid away". (ITEPA ss.70,72)
In the author's view, therefore, the comparison should be between
- the approved amount, based on the actual business miles travelled in the tax year, and
- the total of all mileage allowance payments made to the employee during the tax year.
Nevertheless, the author's advice is that, as HMRC's published guidance uses the "like for like" method, employers should also use that method when testing for any tax and NICs liabilities on mileage allowance payments.
...back to 27 October 2005
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For Payroll and Human Resource Professionals
