One way to account for business related travel is via a claim for business mileage. Whether you’re a self employed individual, a company director or an employee, a claim for business mileage ensures you’re reimbursed for the costs of using your personal vehicle whilst doing your job.
In this article we will explore how to identify business mileage and how much to claim.
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What Is Business Mileage?
If you’re and employee, a director of a limited company or a self employed individual and you use your own vehicle to undertake journeys that are a direct result of doing your job (this usually doesn’t include your commute to the office) then you are doing business mileage and you may be able to reclaim some of the costs you’ve incurred from the business. If the business repays you at the right rate when you claim for business mileage then there will be no tax to pay for the individual and the business is able to obtain tax relief on the amount reimbursed. The definition of business mileage will always be the same for each type of claimant – “travel an individual is obliged to make in order to complete the duties of their employment”. Unfortunately HMRC do not consider travel to and from a permanent workplace as business mileage which means that the daily commute of an employee to the workplace is not usually allowed for a HMRC mileage claim. There is an exception to this when the workplace is considered to be temporary which may result in the mileage being allowed. We will explore temporary workplaces below in some detail.
HMRC Mileage Allowance
Rather than every individual claiming different rates and then having to justify their claim, HMRC have pre approved amounts to claim for business mileage. The mileage allowances below can be paid tax free which means that if a business reimburses it’s employee’s or directors this amount or less then there will be no further tax implications for the business or for the claimant.
It is worth noting that an additional 5p per mile per passenger can be claimed when carrying a fellow employee in a car or van on a business journey and that the bike allowance is only available to limited companies and not to the self employed.
The above rates can be applied to any business mileage undertaken by employees, directors and self employed individuals. The 10,000 mileage threshold is per tax year and where an employee has more than one employment then providing the employers are not associated companies then they will receive 2 allowances.
An employee undertakes 20,000 business miles in the 2020/21 tax year. The employer uses the HMRC approved mileage rates and reimburses the employee £7,000 (10,000 x 45p + 10,000 x 25p). This amount is tax free for the employee and the employer receives tax relief on the full £7,000 by including it as an expense in the accounts.
As previously mentioned you cannot claim for business mileage when commuting from your home to a permanent workplace but there are situations where you undertake a regular commute to a temporary workplace. This is very common amongst the contractor community who work fixed term contracts. A workplace would be considered a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose. A workplace would still be considered temporary providing either of the following apply:
– The employee spends less than 40% of their overall work time at a clients workplace.
– Where the employee spends more than 40% of their overall work time at the clients site but the overall duration of the assignment is not expected to exceed 24 months.
Determining whether a workplace is permanent or temporary is often one of the most difficult parts of making a business mileage claim. The examples below will help to demonstrate how these rules are applied in the real world.
Temporary Workplace Examples
EXAMPLE 1 – A self employed electrician drives to a clients house to rewire some faulty equipment. They spend a full week working at the clients house to complete the job. In this example the electrician has spent more than 40% of their working week at the clients but since the job is not expected to last more than 24 months the workplace is considered temporary and the electrician can make a claim for business mileage.
EXAMPLE 2 – An employee of an accountancy firm visits a local client every Friday afternoon to assist with a bookkeeping task before returning to the office. They spend 2 hours of their work day at the clients premises and this engagement has been taking place every week for the past 4 years. In this example the duration of the engagement has exceeded 24 months but it doesn’t matter because the employee still spends less than 40% of their overall work time at the clients so the clients workplace is considered temporary and the employee can make a claim for business mileage both to and from the clients premises.
EXAMPLE 3 – A contractor who trades through a limited company has worked an 18 month contract (outside IR35) at a clients premises. The client offers them a second contract to work at the same location for a further 12 months which is accepted. In this example the clients premises would initially be considered temporary so the contractor can make a claim for business mileage when traveling each day to the client premises but only up until the point they know the engagement will exceed 24 months at which point the work place becomes permanent and the mileage can no longer be claimed. The date the second contract is accepted would generally be used as the date it was known the engagement will exceed 24 months.
How Do I Claim For Business Mileage?
Business mileage claims are claimed directly from the business you work for. This may seem strange for self employed individuals as you are effectively claiming from yourself but the claim will reduce the amount of income tax and national insurance paid on self employed profits. Just remember to keep detailed records (see below).
For employees and ltd company directors your employer should have an expenses claim form for business mileage. If your employer does not allow you to claim the business mileage or they reimburse you less than the HMRC approved mileage rates then you can make a claim for tax relief directly with HMRC instead. Again this claim would be made on your self assessment or using the HMRC online tool for employment related expenses.
Paying A Different Amount For Mileage
Technically a business doesn’t need to reimburse business mileage to it’s employees at all and where they do they can use any rate they want but this will result in a number of issues.
Firstly if the employer pays less than the approved rates then the employee could be left out of pocket for an expense they wouldn’t normally incur outside of their employment which wouldn’t be fair. In this situation HMRC will give the employee tax relief on the difference between what the employer has reimbursed and what would have been reimbursed by when using the HMRC approved mileage rates but this is dependent on the employee having paid tax in the first place. If the tax relief is obtained this results in the employee recouping a further 20%/40%/45% of the difference depending on the highest rate of tax they pay. The employee would make this claim by including the details on a self assessment or using HMRC’s online tool for employment related expenses.
Secondly if the employer pays in excess of the approved rates then this creates a taxable benefit that will need to be declared on the form P11D and results in additional tax liabilities for both the employee and the employer. For more information on P11D’s check out our article What Is Form P11D?
This is why it is normally recommended that employers stick with the HMRC approved mileage rates and in the case of the self employed there is no benefit to using a different rate. Using a lower rate would result in paying more income tax and national insurance and using a higher rate would see the difference treated as earnings anyway.
What About Vehicle Maintenance Costs?
The HMRC approved mileage rates take into account the cost of fuel and all other associated costs. This is why an employee will often spend £10 on fuel to undertake business mileage but end up being reimbursed more than this by the employer. This means that services, repair work and general maintenance costs of the vehicle cannot be claimed on top of the mileage allowance.
HMRC also provide us with the advisory fuel rates below which identify how much of the mileage allowance is in relation to fuel, based on the fuel type and engine size of a vehicle.
For the purposes of the advisory fuel rates any hybrid vehicles would either be classed as petrol or diesel.
These rates are used for a different purpose to the previously discussed approved mileage allowance. As they single out the fuel element only they would be used for the following:
– To calculate how much VAT should be claimed as input vat by a vat registered business. (dividing the advisory fuel rate by 6 would identify the vat element per mile)
– To know how much to charge an employee for using a company vehicle and company fuel for private use. Charging this will ensure the employee avoids a P11D benefit.
– To know how much to reimburse an employee when they have used a company car for business use and paid the fuel.
It is best practice to keep a detailed log of business mileage and the subsequent reimbursement whether you’re self employed or a company recording mileage claims made by employees and directors. The log can take any form but as this is what HMRC would refer to in an investigation scenario it’s best to include the following details:
– Details of journey (from – to)
– Details of vehicle (fuel type, engine size)
– Number of miles claimed
– Mileage rate applied