As we're still heavily into P11D "season" we are continuing our series of articles on specific P11D problem areas, but this month with a twist as the subject matter, business mileage, is usually ignored for P11D purposes.

So you may well be asking why we are spending time on something that is a "non issue" ? The simple truth is many employers make a huge mistake in believing that as long as they are reimbursing employees' business mileage in their own cars at or below the statutory rates of 45p/25p per mile then it's job done, nothing to worry about and nothing to report on the P11D. Wrong, wrong, wrong !!!

HMRC like to spend some time looking at business mileage payments during a PAYE review or audit as there are a number of ways in which tax/NI liabilities can arise (even where the payments are within the 45p/25p rates) and it is often the case that employers have to cough up extra cash to HMRC to rectify matters.

So where do problems exist with business mileage ?

Mileage guestimates/rounding

Many employees hate form filling and claiming expenses and those that do often try to cut corners in any way they can, usually by providing as little information as they can get away with. In the context of mileage claims, it is not uncommon for this type of employee to guess the miles they have driven on business rather than go to the trouble of recording the actual miles travelled on each journey. Sometimes, such claims are easy to spot, i.e. if they end in a 5 or 0 which is one of the first things HMRC looks for.

HMRC has been known to use things like Google Maps to validate or otherwise the miles claimed.

Exaggarated claims

We have reported before that employee expense fraud is huge across the UK. One of the biggest/easiest methods of fraud is to over state mileage claims by a few miles each time.

Again, this is something that is easily checked by HMRC and the onus is on the employer to do their own checks when claims are processed.

Permanent and Temporary Workplace rules confusion

Whether mileage can be paid tax-free or not depends on whether the destination qualifies as a Temporary Workplace. The rules on Permanent and Temporary Workplaces are fairly complex and, not surprisingly, mistakes are often made in recording mileage as business mileage when it doesn't actually qualify as such under tax law.

Ordinary commuting abuse

This is another old trick for the less honest employee who is sick of paying the high costs of getting to or from work each day. Work meetings, deliveries, etc  are arranged at either the start or end of the day and the employee claims the journeys as business travel even although it's virtually the same route he takes every day to get to or from work.

Again, HMRC are wise to this and do check claims out for obvious signs of abuse and can invoke anti avoidance measures to deny relief on the entire journey if they believe the employee is "at it".

Cumulative mileage

Most employees do less than 10,000 business miles in their car each tax year which is fine. But, there are some who do more than this, with the tax-free rate dropping to 25p for any miles over the 10,000 mark.

HMRC look for evidence that the employer is accurately recording cumulative mileage records for each employee to ensure that the statutory rates are being applied properly. Where no cumulative records exist, HMRC could make their own assumptions.

Poor record keeping

Which brings us on to record keeping in general.

For whatever reason, e.g. lazy employees (see above), lack of time in the finance department, poor expense processes and system, etc, many business mileage claims are lacking in detail. Whilst this does not automatically mean that the mileage claims are false or incorrect, what it does mean is that an HMRC challenge is much more likely which will be largely based on assumptions (which may or may not be correct). This could end up being costly for the employer if the records cannot prove that HMRC's assertions are rubbish.

Fuel cards

This another area that causes confusion resulting in mistakes such as failure to report ALL costs on the P11D and failure to account properly for the NI due on the P11D figure.

Depending on the precise arrangements, it is often a completely separate issue for the employee to claim tax relief on the business element directly with HMRC. Some employers think this is their responsibility and can get confused as to what figure to report on the P11D. Cue HMRC with their calculators...

Conclusion

In theory, business mileage reimbursement should be one of the easier aspects of employment tax compliance for employers. Employee travels in his car for work purposes, you pay him no more than what the tax rules say and everyone's happy.

But, the reality is often different. We know many employers who have slipped up in this area and have had to pay additional amounts over to HMRC. Don't let this be you ! Exercise care when processing and checking employee mileage claims, know the tax rules e.g. around ordinary commuting, Permanent Workplaces and fuel cards and make sure you are getting enough detail from employees on journeys made to protect YOUR business.

Just like with driving in real life, if you're not alert at all times when managing your employee expenses, you may steer into a huge pothole which could cause some damage and an unexpected and large bill to pay.

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