How is the tax due calculated on mileage allowance payments made to employees who use their own vehicles on company business?

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In many cases there will be no reportable tax benefit. However, there are two factors to consider.

Mileage allowance payments

Mileage allowance payments are amounts, other than passenger payments, that are paid to an employee for expenses related to use by employees of their personal car, van, motorcycle or cycle for business travel. They do not include payments made in respect of company cars. Mileage allowance payments may be:

• mileage payments made in arrears, i.e. a number of business miles multiplied by a mileage rate
  
  
• allowances paid periodically, e.g. an essential user allowance, which are intended to reflect the standing costs of the vehicle and are reviewed at least annually
  
  
• one-off payments in respect of the business use of the employee's vehicle, e.g. £50 for making the trip, but only if based on a reasonable estimate of the mileage involved
  
  
• payment of expenses incurred in using the employee's vehicle for business travel, e.g. reimbursing the fuel costs, or the cost of a repair to the vehicle while on a business journey.

Almost any payment is included, therefore, as long as it is

• made to the employee, and
  
  
• in respect of the business use of the employee's vehicle.

Whether there is any tax liability for the mileage allowance payments made to an employee is determined by comparing

• the total amount of all of the mileage allowance payments paid to an employee for a tax year, with
  
  
• the "approved amount", calculated by multiplying the total business mileage for the vehicle in the tax year by the statutory mileage rates.

The statutory mileage rates for tax purposes are:

The amounts paid for a tax year are "approved" mileage allowance payments (AMAPs) to the extent that they do not, in total, exceed the "approved amount" for the year. Consequently,

• if the payments made for the year are less in total than the "approved amount", they are all AMAPs and there is nothing to report on forms P9D or P11D, but
  
  
• if the payments made for the year are more than the "approved amount", the payments up to the approved amount are AMAPs but the excess is not "approved" and must therefore be reported on form P9D or P11D.

It should be clear from the above, therefore, that, if an employee only ever pays a mileage rate that does not exceed the statutory mileage rate for the vehicle and, in the case of cars and vans, for the mileage, and never makes any other payments, such as user allowances, there should not be anything to report on form P9D or P11D. There is, however, another factor to consider.

HMRC guidance

The second factor is that HMRC's guidance on how to perform the calculation described above is contradictory. There are two conflicting methods provided by HMRC, namely a "tax year" method and a "like for like" method.

The "tax year" method

This procedure is set out on HMRC's P11D Working Sheet 6 and uses a "tax year" comparison. The comparison is between

1. the payments made to the employee in the tax year, and
   
   
2. the "approved amount" for the number of business miles travelled in the tax year.

Because expenses payments are normally paid in arrears, the mileage used to calculate the payments to the employee is likely to be different from the mileage used to calculate the "approved amount".

Example: An employee received mileage allowance payments totalling htmlpound2,640 between 6 April in one year and 5 April in the next, i.e. 6,600 miles @ 40p. Expenses are paid a month in arrears, so the 6,600 miles were actually travelled in the year between 1 March and 28 February. However, the actual business miles travelled in the tax year totalled 6,000 miles. The "approved amount" is htmlpound2,400, i.e. 6,000 miles @ 40p. Only the first htmlpound2,400 payments are AMAPs. The htmlpound240 excess is reported on form P9D or P11D.

The "like for like" method

In contrast, the procedure set out in HMRC's online Employment Income Manual, from page EIM31230 (www.hmrc.gov.uk/manuals/eimanual/EIM31230.htm), uses a "like for like" comparison. The comparison is between

1. the "approved amount" for the number of business miles travelled in the tax year, and
   
   
2. the payments made to the employee for those business miles, even if some are made after the end of the tax year.

This method seems to be the more sensible approach as it compares the payments made and the "approved amount" for the same business mileage. It avoids the problem demonstrated in the example above

Example: An employee travelled 6,000 miles between 6 April in one year and 5 April in the next. The "approved amount" is £2,400, i.e. 6,000 miles @ 40p. The employee received mileage allowance payments totalling htmlpound2,400 in respect of those miles in the year between 1 May and 30 April. As the payments do not exceed the "approved amount", there is nothing to report on form P9D or P11D.

In the view of the author, it is the "tax year" method, as used on P11D Working Sheet 6, that is defined in section 229 onwards of the Income Tax (Earnings and Pensions) Act 2003. However, in an exchange of correspondence in 2002, HMRC insisted that it is the "like for like" method that is set out in statute and promised to change to P11D Working Sheet to follow that approach. The Working Sheet has never been changed, however.

The author's recommendation is that employer's use the "like for like" method, which HMRC insists is correct, unless the Working Sheet is being used.

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