TaxationWeb’s Lee Sharpe has concerns about HMRC’s guidance on mileage claims and whether or not they already provide for finance costs.
This article has been written in vexed response to HMRC’s woefully scant advice regarding motoring expenses, and in particular whether or not interest or finance costs for the vehicle may be claimed alongside. HMRC seems to have tried quite hard to convince people that its approved mileage rates already include an adjustment for the costs of financing their vehicle, so they should not (or cannot) claim separately, for loan or HP interest.
However, the facts would appear to suggest otherwise, and that relief for finance costs was deliberately removed, despite the mileage rates making no provision for them.
The rules for employees are different from those for the self-employed. But since the approved mileage rates are the same, whether you’re an employee or self-employed, a broadly similar issue arises.
Summary of Rules for Employees
Employees used to have the choice between:
1) A “strict” or “actual” claim, based on the aggregate of motoring costs actually incurred, subject to the fraction of qualifying work mileage over total mileage in the tax year (and this could include a corresponding fraction of any loan or hire purchase interest for the vehicle).
2) A purely work-mileage-based claim, relying on rates published as being acceptable to HMRC (formerly the Inland Revenue) (now at ITEPA 2003 s 229 et seq.)
But the first option was abolished from 2002/03 thanks to provisions in the 2001 Finance Act. (FA 2001 s 57, et seq.)That legislation specifically withdrew relief for the capital cost of a car (Capital Allowances) and removing access to Capital Allowances is what in turn kiboshed a claim to finance costs for employees, because the old ICTA 1988 s 359(3) directly relied on part of the Capital Allowances code.
So, for roughly the last twenty years since 6 April 2002, employees have had only one route to claim motoring expenses: approved mileage rates. Arguably, whether or not those approved mileage rates actually include a component to cater for finance costs since then, amounts to no more than a cruel distraction for employees: they cannot claim either way, because the route for employees has been specifically blocked. The article covers HMRC guidance for employees basically because that is where this sorry saga started, but also to help the reader appreciate just how many taxpayers are affected. And why, perhaps, the whole issue of mileage rates needs to move to a more fundamental re-balancing.
Note as an aside, however, that HMRC appears to accept that, while volunteers are not employees, volunteers may still access relief for finance costs alongside their mileage claims – see EIM71165: Volunteer Drivers’ Guidance: Other Costs.
Summary of Rules for Self-Employed
Self-employed taxpayers are in a broadly similar position to the ‘original’ or pre-2002/03 options for employees, namely:
1) A “strict” or “actual” claim, based on the aggregate of motoring costs actually incurred, (potentially including finance costs such as loan or hire purchase interest), subject to the fraction of qualifying business mileage over total mileage in the tax year, or
2) A purely business-mileage-based claim, relying on those same rates published for employees as being acceptable to HMRC (formerly the Inland Revenue) (now at ITTOIA 2005 s 94B et seq.)
- The rules for what qualifies as “work” mileage for employees differ in the detail from what qualifies as “business” mileage for the self-employed. (Note that “work” and “business” are not special or defined terms: they have been used here simply to highlight the difference in approach, employed -v- self-employed).
- The mileage rates option (2) was originally permitted only for smaller businesses with annual turnover below the VAT registration threshold when a given vehicle was first acquired. However, when Finance Act 2013 introduced cash accounting for small businesses and a “simplified expenses regime” for the self-employed as two related but separate threads, (see FA 2013 Schs 4&5 respectively), the simplified expenses – including mileage rates for motoring – were basically opened up to practically all businesses owned entirely by non-corporates, while cash accounting got the monetary eligibility thresholds.
- That cash basis also has a £500 annual limit for loan finance costs such as interest so, while (broadly) anyone in self-employment can use the business mileage rates, if they have also adopted the cash basis, then it is possible that vehicle finance costs could be restricted by another route. This is a “simplification” to which we shall return later.
There has been some debate since their introduction in Finance Act 2001 about whether or not the AMAP or Mileage Allowance rates include provision for finance costs, such as loan or hire purchase interest, as part of the capital or standing costs component in the higher initial rate. Certainly we know that the predecessor FPCS rates (as applied prior to 2002/03) did not include finance costs, as already noted in Motoring Expenses and Mileage Allowance - Are Employees Who Use Their Own Cars Getting a Bad Deal? not least because under the pre-2002/03 regime, there was specific provision for finance costs as a separate claim; also, the Inland Revenue had already admitted they did not.
For example, as per the Inland Revenue’s old (defunct) IR125 booklet (pre-2002/03 regime) for employees:
“Do authorised rates include any allowances for loan or hire purchase interest? No.” [It then went on to explain how employees could get further tax relief for interest by writing to their local tax office – up to and including 2001/02]
The NEW (2002/03 and onwards) booklet confirmed only that interest could no longer be claimed by employees; no mention of whether or not the new AMAP rates provided for finance costs. We know why: the recently-revised legislation removed the route to claim.
Could HMRC’s Business Income Manual for the self-employed perhaps shed some light? After all, they also use exactly the same rates for their mileage claims as are used for employees. Well, here’s a thing:
At least as far back as 2004, BIM47701: Specific deductions: Travel & Subsistence: Use of Vehicle Mileage Rates: Introduction* used to include:
“What Costs are Not Covered by the Mileage Rate?
The mileage rate does not cover costs that are specific to a particular journey such as tolls, congestion charges and parking fees. These will be allowable as a Case I deduction where they are incurred solely for business purposes.
The taxpayer can claim the business proportion of the interest on a loan used to purchase the vehicle.” (Emphasis added)
Seems fair enough, and quite straight forward. If those mileage rates did include a proportion to cover finance costs, then self-employed taxpayers absolutely would not have been allowed to make a separate claim for loan or hire purchase interest as well.
*(As an aside, note that the previous embedded link above uses Wayback Machine – The Internet Archive – rather than trusting HMRC’s own records of changes to its website. Because I do not trust HMRC’s records, due to things like this – Dividend and Savings Allowances: .Gov.Fail Becomes .Gov.CannotbeTrusted).
Now, the updated version of that page – BIM75005: Simplified Expenses: Expenditure on Motor Vehicles, has shortened that particular section:
“Costs Not Covered by the Mileage Rate
The mileage rate does not include incidental expenses incurred in connection with a particular journey, such as tolls, congestion charges and parking fees. These will be allowable as a deduction where they are incurred solely for business purposes.”
No mention of interest costs: the last sentence has disappeared. Which is remarkable, given how similar the old and the new pages are otherwise.
But what is more remarkable, is that BIM75005 itself used to say, up until October 2015:
“Costs not covered by the mileage rate
The mileage rate does not include incidental expenses incurred in connection with a particular journey, such as tolls, congestion charges and parking fees. These will be allowable as a deduction where they are incurred solely for business purposes.
The business proportion of the finance element of a hire purchase or finance lease may also be claimed as a deduction.” (Emphasis added)
Some might find this rather strange, to say the least. If the pages had been re-organised in the Manual, as from the old BIM47701 to a new BIM75005 or perhaps shuffling around the content on that page, then this might have been simply a “cut-and-paste” error of omission. In fact, the only change to the text of BIM75005 from October 2015 to the next version in April 2016 is the deletion of that single sentence: “The business proportion of the finance element of a hire purchase or finance lease may also be claimed as a deduction”.
We know that HMRC must have had a very good reason for deleting that sentence, given we have repeatedly been told that HMRC has to weigh up the cost and resources involved for any changes to its Manuals, no matter how helpful we think they might be.
So far, to summarise, we have HMRC deleting an important part of its main guidance on motoring expenses for the self-employed in its Business Income Manual. But what about guidance for employees?
HMRC’s 480 booklet (“Expenses and Benefits”) is in most respects a very useful guide. It is not as comprehensive as HMRC’s technical guidance, but it is used by a great many employers and practitioners. It has also contained this entry since at least as far back as 2010 in Chapter 16: Mileage Payments and Passenger Payments
“Approved Mileage Allowance Payments (AMAPs) …
AMAPS cover any general or mileage-related expenses in relation to the car itself (such as fuel, servicing, tyres, road fund licence, insurance and depreciation), plus interest on any loan to buy the vehicle. No additional deduction is available for expenses of that type.” (Emphasis added).
This would seem to be fairly authoritative but remember, the guidance specifically for volunteer drivers in its Employment Income Manual (also referred to above) at “EIM71165: Volunteer Drivers’ Guidance: Other Costs:
"Interest on a Loan to Buy My Car
If you buy your car with a loan or on hire purchase, you can deduct a proportion of the interest you pay in working out your profit. Only count the interest included in hire purchase instalments.”
There is of course no way that volunteers would be permitted to claim finance costs separately, if the approved mileage rates already ‘counted’ finance costs: again, that would be a duplication of relief and unacceptable to HMRC.
Summary so Far
So, just to recap, according to HMRC: if you’re an employee, the AMAP rate DOES include finance costs, but if you’re a volunteer it implicitly DOES NOT. If you’re self-employed, it DIDN’T include finance costs, although HMRC decided to omit that fact about six or seven years ago. All clear?
Except – again, just to recap – THEY’RE ALL THE SAME RATE – not only the same as each other, but the same as the old FPCS rate that the Inland Revenue had previously admitted did NOT include provision for finance costs (at least, they were the same as the old FPCS rates until 2011, when AMAPs were nudged up a little)
One might try to argue that, while they’re all the same rate, the ‘new’ 2001 AMAP higher initial rate was extended from 40p per mile for the first 4,000 work miles to 40p per mile for the first 10,000 business miles, so maybe the finance costs element is in that increase? However,
- It was still the same RATE of 40p per business mile (initially, although it did get nudged up to 45p in 2011) and 25p above 10,000 business miles
- HMRC and the government knew in 2001 that almost 80% of employed drivers were doing 4,000 work miles or less per year, so it would be perverse to try to argue that extending that initial band beyond 4,000 miles was somehow meant to cover finance costs for the vast majority of affected employees.
- The only time that the relevant Finance Bill clauses were debated was in May 2001. In that debate, the Shadow Work and Pensions Spokesperson asked the Financial Secretary to the Treasury – twice – if the “new” AMAP rates would cover the Capital Allowances and loan interest that employees were about to lose under the statutory mileage basis and, as appears to be customary, the government's' replies utterly failed to address the question properly. But the government did let slip that:
“The change will be a significant benefit to those driving between 4,000 and 10,000 business miles a year in small and economical cars, and to the many employees who drive up to 10,000 business miles in medium-sized cars.”
It is difficult to see mathematically how one might argue that the extended initial band could be a ‘significant benefit’ to those in medium-sized cars and therefore already on the 40p/25p rate, if it were suddenly supposed to be doing significantly more heavy lifting in terms of extra fixed costs, such as covering finance costs, under AMAP. Rather, the extension appears to have been an attempt to accommodate a recognised quirk in the published statistics that employees doing high business mileage tended to run larger, not smaller, cars – as alluded to in the “many employees…” above.
Why This Matters
HMRC’s conflicting and confusing attempts to keep taxpayers informed(?) as to what they can and cannot claim tax relief on has also worked its magic on advisers to the self-employed: there are those who are 100% sure that finance costs cannot be claimed alongside if also using the published mileage rates; there are those who are 100% sure they can; and there are those who have sailed serenely through the last c20 years of changing guidance blissfully unaware that there was any disagreement in the first place.
One of the key reasons offered for why a self-employed taxpayer is not entitled to claim for vehicle finance costs alongside a mileage allowance claim is found in the newish ITTOIA 2005 s 94D introduced under the “simplified expenses regime” through FA 2013 Sch 5, (see above), which says that a claim for mileage rates effectively replaces any other claim for “any expenditure incurred in respect of the acquisition, ownership, hire, leasing or use of the vehicle” (emphasis added). Accountants have argued a motor loan or hire purchase agreement would constitute finance costs of acquiring the motor vehicle.
This makes sense. However, other accountants argue that under normal accounting principles, finance costs are automatically streamed or handled separately. In other words, finance costs do not ‘care’ what they are for, and standard accounts would not treat car loan or hire purchase interest as motoring expenses, or as vehicle acquisition costs, but as part of the business’ interest overheads. Certainly, the costs of a general loan to support the business will not typically go anywhere near motoring or mileage expenses.
The matter is further complicated by the fact that these “simplified” expenses were drawn up in tandem with a “simple cash basis” regime and HMRC originally intended that there would be no loan interest relief at all, anywhere, under the cash basis but ultimately relented and offered a token £500 (albeit with its own special conditions); the simplified expenses can apply either to businesses that use normal accounting principles or the cash basis and the interaction between the regimes is all rather convoluted.
It seems to me that HMRC believes that there should be no relief for vehicle finance costs if you are using mileage rates, either as an employee claiming Mileage Allowance Relief since FA 2001, or under self-employment and using the FA 2013 simplified mileage rates for motoring expenses. Admittedly, this is tidy, and consistent... except that HMRC seems happy for volunteers to continue to claim motor finance costs. While it seems that the effective prohibition on access to separate relief for finance costs for employees is pretty much settled, there disagreement lingers over the self-employed.
This might explain, but not excuse, why the Business Income Manual for the self-employed was so quietly updated to remove the “offending lines” as noted above, albeit around 2½ years after the new regime took effect from April 2013!
There is also support for this inference from HMRC's tacit position, in Osborne v HMRC  UKFTT 0373 (TC), a case usually noted because the taxpayer successfully claimed for the costs of a quite extreme fitness regime required for their occupation as a specialist diver but which I think deserves far more publicity, given that HM Inspector basically argued, and I paraphrase:
- You cannot expect me to allow you to claim tax relief for driving such an expensive car
- I have made several mistakes but you were careless, and
- It's OK for me to impose a penalty for carelessness because my boss approved it, as they always do
So much to unpack there, the fact that HM Inspector disallowed vehicle finance costs while unilaterally imposing mileage rates on the ...arguably... self-employed diver, is basically a footnote.
However, I am not sure if HMRC has considered the tension here between the usual accounting treatment of finance costs more generally - i.e., from the perspective of having a positive capital account and the trader funding the business out of his or her own pocket - as against the cash basis and the specifics of that simplified deductions regime. Or would that reveal that the simplified deductions are not really that simple? (In fact, it would seem that HMRC has an issue with interest relief more generally, as residential property landlords will no doubt readily attest!) It would have been far better for everyone else, if HMRC had added fulsome explanation to its revised position on finance costs and mileage, rather than removing any reference to it at all. It really does seem as if HMRC is trying to hide something.
Perhaps more important, particularly when it looks like interest rates are set to rise significantly in the present day, is that the new mileage rates – just like those same FPCS rates before them – appear to have had no component to account for the costs of financing a motor vehicle. For roughly 20 years. If so, then surely the changes to the legislation for employees in 2001 and for the self-employed in 2013, to prohibit finance costs, would have warranted something in the rates, in exchange? And if not then, then surely it’s about time that the mileage rates were adjusted now?