What is the calculation method for tax due on mileage allowance payments made to employees who use their own cars 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 employees for expenses related to the use 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. essential user allowances, 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
• payments 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 (to quote the legislation),

• “for a tax year, the total amount of all such payments made to the employee for the kind of vehicle in question”, and
• “the approved amount for such payments applicable to that kind of vehicle”.

The “approved amount” is calculated by multiplying together

• “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” and
• “the rate applicable to that kind of vehicle”.

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, for a tax year, the total of the payments made does not exceed the “approved amount”, they are all AMAPs and there is nothing to report on form P9D or P11D, but
• if, for a tax year, the total of the payments made is 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 employer 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 in HMRC’s P11D Working Sheet 6 and uses a “tax year” comparison.  The employer enters:

• in Section 1, the total mileage allowance payments made to the employee in the tax year, and
• in Section 2, the total business miles travelled in the tax year. 

The total number of miles is then multiplied by the appropriate statutory mileage rate and the result, the “approved amount”, is then compared with the total payments shown in Section 1.

The comparison, therefore, is between

• the payments made to the employee in the tax year, and

• 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 using his personal car.

Section 1: Total mileage allowance payments made in the 2009/10 tax year are £2,640 (6,600 miles @ 40p).  As expenses are paid a month in arrears, the 6,600 miles were actually travelled in the year between 1 March 2009 and 28 February 2010.

Section 2: Total business mileage in the 2009/10 tax, between 6 April 2009 and 5 April 2010, is 6,000 miles.  The “approved amount” is, therefore £2,400, i.e. 6,000 miles @ 40p.

The employee received payments of £2,640 in the tax year.  Only the first £2,400 payments are AMAPs.  The £240 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

• the “approved amount” for the number of business miles travelled in the tax year, and
• 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 using his personal car.

Total business mileage in the 2009/10 tax, between 6 April 2009 and 5 April 2010, is 6,000 miles.  The “approved amount” is, therefore £2,400, i.e. 6,000 miles @ 40p.
Total mileage allowance payments for those 6,000 miles are £2,400, paid between 1 May 2009 and 30 April 2010.

As the payments do not exceed the “approved amount”, there is nothing to report on form P9D or P11D.

Which is the correct method?  In the view of the author, the method defined in the legislation (section 229 onwards of the Income Tax (Earnings and Pensions) Act 2003), is the “tax year” method, as used on P11D Working Sheet 6.  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 P11D Working Sheet 6 to follow that approach.  The Working Sheet has never been changed, however.

The “like for like” method is promoted in HMRC’s technical guidance.  In HMRC’s Expenses and Benefits A to Z, at www.hmrc.gov.uk/paye/exb/a-z/m/mileage-expenses.htm, it is not clear which method is being demonstrated.

On balance, the author’s recommendation is that employers use the “like for like” method, which HMRC insists is correct, unless they are using P11D Working Sheet 6.  But it would be good to have one consistent method in use, one that reflects the requirements of the legislation.

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