ExpenSys and Business Mileage in the United Kingdom
Management of mileage in the United Kingdom is complex and commonly involves a great deal of manual involvement in order to balance the requirements of employees, employers and HMRC.
ExpenSys is designed to automate the reimbursement of business mileage whilst maintaining compliance. This document sets out the key issues and how they are supported by ExpenSys.
Recording Business Mileage
HMRC require that the start point, destination, distance and purpose of each journey must be recorded. The information given must be clear to the authorising manager. The start and end point can be either an address, post code or fixed known location (e.g. ‘Company HQ’) provided that the information given may be clearly identified by the authorising manager and the employer. ‘Way Points’ may be included.
ExpenSys can assist in verifying distances travelled by entering journeys into a mapping facility. The current functionality interfaces with the Bing Maps API under licence. Use of this functionality is optional and free of charge. The distances calculated may be overridden by the claimant in the event of preferred or necessary diversions, provided a reason is given. Such overrides are highlighted in the Expense Claim.
This section refers to cars that are owned or leased by the employer.
(Please note that managing the tax issues surrounding the supply or use of the vehicle is outside of the scope of ExpenSys, which deals only with the re-imbursement of the cost of mileage).
Reimbursement may be managed in a number of ways:
1. Banded Mileage Rates for Company Car
Up to five levels of banded rates per fuel type may be established and maintained in ExpenSys.
HMRC provide guideline rates according to fuel type and engine size. Drivers may maintain multiple vehicles, in which the rate paid is related to the fuel type and the engine size indicated in each band. ExpenSys distributes emails to all customers advising changes to the HMRC guideline rates when such changes are published.
The employer is not obliged to follow the HMRC guidelines, but anything paid over the guideline rate is taxable on the employee unless the employer has agreed a dispensation (which may be achieved for certain types of vehicles or business journeys). It is also possible for the employer to pay the tax on behalf of an employee. Conversely if an amount is paid that is less than the guideline rate, then the employee can claim a tax rebate on the difference.
2. VAT Recovery on Banded Rates for Company Car
Provided that the employee indicates they have a VAT Receipt for the fuel, ExpenSys calculates VAT at the standard rate on all Company Car Mileage reimbursed.
It is a requirement of the European Union that a VAT receipt is produced in order to recover any VAT including VAT on fuel, this is irrespective of the fact that it is not possible to buy fuel in the UK without paying VAT.
Given that some journeys will inevitably include non-business mileage, and vehicles may be refuelled in between trips, checking every receipt against every business mileage journey is not an exact science. However, the employer should be able to demonstrate to HMRC that sufficient VAT receipts can be produced to cover overall expenditure. If the employer attempts to recover VAT on mileage without being in possession of receipts commensurate with their overall VAT reclaim then they may be open to challenge.
For this reason ExpenSys requires the employee to indicate whether or not a receipt has been obtained to cover fuel used in respect of each journey. If no such indication is given, no VAT will be calculated. Claimants may upload receipts direct into ExpenSys using a variety of methods including scanning to desktop, camera capture on mobile devices or centralised/bureau scanning.
Company Car Drivers with Fuel Cards
When Fuel Cards are given to drivers of Company Cars effectively all the fuel is being paid for by the employer including that used for non-business journeys. The value of the fuel used for private journeys is taxable on the employee unless repaid, and the VAT on this amount is not recoverable.
ExpenSys may be configured to download the Fuel Card Statement Amount and to track the Odometer reading from month to month. The business mileage is deducted from the change in the odometer reading. The remainder is the number of private miles travelled.
ExpenSys will support reconciliation of the private miles in the following ways:
1. Fuel Scale Charge (Fully expensed)
No money is reimbursed to the employee, but an adjustment is made to P11D or PSA on the basis of the ‘Fuel Scale Charge’.
2. Repayment according to a Rate per Mile
The employee reimburses the employer for the amount of private miles (normally at the HMRC guideline rate for the car) e.g. ‘Number of Private Miles’ x ‘Rate per Mile for the vehicle’.
3. Repayment as a Proportion of Expenditure
Under this method the employee reimburses the company for the amount of private miles in proportion to the total mileage. E.g. If 1,000 miles have been added on the odometer, and 750 business miles have been logged, then the driver will reimburse 25% of the value of the Fuel Card Statement.
Reimbursing Actual Cost of Fuel
ExpenSys tracks the Odometer reading from month to month. The business mileage is deducted from the change in the odometer reading. The remainder is the number of private miles travelled.
The employee pays for all fuel purchased. The employer pays the employee for the amount of business miles in proportion to the total mileage. E.g. If 1,000 miles have been added on the odometer, and 750 business miles have been logged, then the driver will be paid 75% of the amount on the fuel receipts.
Car Allowance (also known as ‘Cash Option’ schemes).
Under these schemes the organisation pays the driver an amount in compensation for the cost of using his own car. This amount covers the cost of day to running, vehicle license and depreciation etc. and is normally taxed via payroll. Journeys are logged in ExpenSys and fuel is reimbursed at a banded rate.
Business Journeys in a Private Car
Several years ago, banded rates were also applied to business journeys in privately owned cars. Drivers were expected to declare the details of the car used on every trip, although neither the employer nor the employee’s approver were in a position to verify the details of the specific car being driven on any particular journey. The employee was in a position to use more than one car for different journeys, or change cars without informing the company. Accepting this, HMRC have since moved to a single maximum rate of reimbursement for business mileage in privately owned cars
The HMRC guideline reimbursement rate for ALL business mileage in a privately owned car is currently 45p per mile for the first 10,000 miles in any tax year (from 6th April to 5th April), and 25p per mile thereafter, irrespective of vehicle. (This does not include employees subject to a Car Allowance or Cash Option scheme. See above). This amount includes both compensation for the cost of use of the employee’s vehicle and the proportion related to fuel (the fuel element).
Employers and employees need to be aware that when the employer pays over the guideline rate, the excess is taxable on the employee, and if under the rate, the employees are entitled to a tax rebate on the difference. Employers may take the view that they have some obligation to let the employee know what that difference is, but this is difficult without some level of automation.
Almost all ExpenSys customers currently pay a flat rate in respect of business mileage in a privately owned car.
VAT Recovery in respect of business mileage in a privately owned car.
Unlike Company Cars, VAT is not recoverable on the entire amount paid to the employee. Only the fuel element of the reimbursed amount is VAT recoverable.
Establishing the fuel element is complicated by the fact that the VAT recovery guidelines published by Customs & Excise (although now a department of HMRC) is at variance with the HMRC position on overall reimbursement. Guideline rates for VAT recovery continue to be published based on the fuel type and engine size of the vehicle even though it is accepted by HMRC that the details of the private vehicle in use for any given journey are difficult, if not impossible, for the employer to verify.
The compromise to this position is to apply an average value for the fuel element upon which the VAT may be calculated. This removes the need to verify the vehicle driven on every journey, and greatly simplifies both mileage capture and processing for employee and employer alike. Virtually all ExpenSys customers have adopted this method, although it is recommended that the amount of the fuel element is agreed with HMRC in advance.
This position has not to date been challenged by HMRC in customer VAT audits, and no ExpenSys customer has ever been obliged to pay tax related penalties with respect to this or indeed any of the methods described above.
Banded Rates for Privately Owned Cars
Mileage Rates according to Fuel Type and Engine Size may be supported for Private Cars, but requires the creation of individual Vehicle Schemes for each band, setting the amount of fuel element for each. However, maintaining this across a significant demographic will be onerous and is not recommended.
The standard Banded Rate method (as applied to Company cars or Car Allowance Schemes) cannot be used because, unlike the method described above, the VAT calculation is made on the entire amount, irrespective of the threshold, and would not therefore be compliant.
Home to Work Mileage
The journey from home to the employee’s ‘normal place of work’ is regarded as commuting and generally speaking cannot be reimbursed.
However, dispensations may be negotiated under a range of circumstances. For example: Home workers who do not commute but are sometimes required to attend at the employer’s place of business; Site workers who are governed by the number of times they attend at a given site and over a given period. There have been circumstances where ‘Home to Work’ mileage has been paid and taxed accordingly by arrangement. ExpenSys can configure a ‘switch’ on the mileage form designed to indicate that a journey has been made under such an arrangement, and appropriate data may subsequently be reported.
ExpenSys by default provides a declaration on each mileage claim under which the employee declares that the journey does not include ‘Home to Work’ mileage. A field may alternatively be provided to enable the employee to deduct ‘Home to Work’ mileage from the total mileage for the journey.