TaxationWeb’s Lee Sharpe warns that the rising cost of motoring versus outdated tax reliefs are leaving many employees out of pocket, and out of options - which is pretty much how HMRC wants it.
This article will consider the evolution of the tax regime for employees who use their own private vehicles (primarily cars) for business purposes – particularly in light of rapidly rising costs as fuel, parts and manufacturing expenses reach unprecedented heights. And it will consider in passing why the “simplifications” so beloved of HMRC and the government often do NOT benefit the taxpayer. Of course any opinions expressed in the article are those of the writer, rather than TaxationWeb itself.
Forecourt prices are headline news and likely to remain so for months to come, as Russia’s invasion of Ukraine and the resulting sanctions push fossil fuel prices ever upwards.
But the pandemic lockdowns from 2020 onwards also saw global slow-downs in extraction and fabrication – in particular, issues with semiconductor circuitry supplies have caused problems for the car industry and new car production. New cars are scarce – and expensive.
One might hope that working from home would invite a new, less car-centric future but the reality so far is that the lack of new cars means that demand for second-hand cars has in turn soared – car prices rocketed by almost 30% in 2021 alone.
To emphasise: the cost of buying and running a car has risen significantly, over the last year or so. So far, so obvious.
Finally, the cost of borrowing generally, such as loan or hire purchase interest as may be necessary to finance a car, and which has been kept low for many years, has more recently been allowed – even encouraged – to rise, by the Bank of England, to discourage spending in the teeth of rising inflation. The cost of borrowing deserves special mention, not least because it really does seem that HMRC would very much like for it to get no mention at all - see Motor Expenses and Mileage Claims: Can You Claim Finance Costs?
None of this is good news for people who do a lot of driving as part of their job. Think taxi drivers and delivery drivers who in many cases are self-employed; also care workers and community nurses who will typically be employees. The tax rules for the self-employed are quite different: simply put, the self-employed are also suffering from increased motoring costs for their work but at least they will be able to claim those rising costs back for tax purposes. But this is not the case for employees – for the reasons why, we need to go back quite some time, to when your intrepid writer was young and full of optimism – OK, let’s just say it was a long time ago, when HMRC was called the Inland Revenue…
Very simply, the taxation of general employment earnings is meant to apply only to “net taxable earnings” or the “profit” from the employment – the net reward. So, where an employer reimburses an employee for ‘genuinely allowable’ travelling costs he or she has incurred, this is not a profit, so it is not taxed. The problem for employees has usually been that tax law adopts a very narrow view of what count as ‘genuinely allowable’ costs of employment.
(Schedule E purists may argue “earnings” is different from “reimbursement of costs”. It may also be argued that travelling between appointments is not actually “the employment” but merely something to “put the employee in a position to perform the duties of the employment” – a mutable device of words, that seems to permit the government to tax practically any form of income, while denying all but the most quintessential of expenses, albeit the “necessary attendance” rules should help – in theory. More on the first point below; the second was covered in an earlier article.)
Bizarre Tax Triangle
The relationship between employee, employer and tax authority has traditionally been an awkward, triangular affair in which tax law essentially permits only two parties to speak to each other at any given time. For example, the reimbursement of an employee’s business motoring expenses.
In the good old days, an employer typically used Form P11D to notify HMRC of such reimbursements. And, if the employee did not want to be taxed thereon, (or wanted tax relief he or she would not get otherwise), then they would have to file a personal claim under ICTA 1988 s 198, etc., that such expenses had been incurred, broadly, for business purposes. This to-ing and fro-ing was a pain for all concerned. However, it was necessary, in case:
- The employer tried to use reimbursements excessively to reward its employees – the “profit” on which would be taxable, or
- The employer was a tightwad and reimbursed less than the employee’s actual costs, in which case the employee should at least theoretically be able to claim for tax relief on the difference between employment-related motoring expenditure and the amount reimbursed – if any; also because
- It was actually quite a complex or involved calculation to determine how much an employee might be able to claim on a formal/statutory basis, for buying and running a car used partly but necessarily for their work alongside non-employment or private purposes, which we shall cover next.
Employee Claims – Strict or Actual Basis
In those days, a “strict” or “actual basis” claim would involve the employee having to record, for a given tax year:
1) Qualifying work-related mileage, as a fraction of total mileage covered in the year
2) Fuel bills, oil, tyres, etc.
3) Servicing, MOT, repair costs
4) Insurance, motoring subscriptions/repair cover
5) Capital Allowances on the cost of the vehicle
6) Finance costs such as Loan or HP interest
The employee would have to tot up (2) – (6) in order to work out their total motoring expenses for the tax year, and then apply the fraction derived from (1) to those costs to work out the amount for an employment tax relief claim. It was a major pain, but if an employee wanted the tax relief, it was a fair, consistent and reasonably precise method.
Unfortunately, the Inland Revenue struggled to keep up with processing all the P11Ds it insisted on, while having to provide for employees to have the means, the time and the knowledge to make a claim, potentially up to several years later. (And, yes, of course an excessively large Income Tax bill should be a fillip to putting in one’s expenses claim but HMRC also struggled to process all of the corresponding claims, and I very much doubt that all employees who could claim, did claim – which is not OK, unless you’re a tax inspector.)
Dispensing With Some Accuracy
Still back at the dawn of time, the Inland Revenue had the discretion to agree dispensations (“exemptions”) from the P11D reporting regime for a given category of expense, basically on an employer-by-employer basis, so long as HM Inspector could be satisfied that the level of reimbursements adopted by that employer – £X per day, or Ypence per work mile – were intended to amount to no more than necessary to meet their average employee’s average expenditure on behalf of the employment. So, an individual employee might gain a little, or lose a little, under a dispensation agreement, but the difference was not intentional, nor should it have been substantial (else HM Inspector might require the dispensation be refined, or even revoked).
The Fixed Profit Car Scheme (FPCS) was introduced in 1990 as a kind of optional dispensation at the national level, so that employers could adopt the corresponding Authorised Mileage Rates without having to worry about accusations of over-reimbursing their employees; likewise employees would not have to make long and complex claims on a strict ‘actual basis’, unless they wanted to. They could just log all work mileage and base their personal claims according to the rates applicable to their car’s engine capacity.
So What did the FPCS Rates Cover - and NOT Cover..?
The government confirmed in 2000 that in fixing the FPCS rates, the Inland Revenue considered:
- Repairs, replacement and servicing
- VED/road tax
- Depreciation – loss in capital value of the car
- A corresponding proportion of the finance costs (e.g., loan interest) to purchase the car
An employee could base their claim for tax relief for motoring expenses on the Authorised Mileage Rates even if their employer had not signed up to the FPCS.
Note that up to now, employees still had the option to make their individual claims under the strict basis if they preferred. And either way, loan interest was still claimable (the depreciation element of the FPCS effectively cancelled out Capital Allowances under the mileage route, however).
Mileage rates for 2001/02 (the last year of the “old rules”)
Up to 4,000 work miles
Over 4,000 work miles
Up to 1,500cc*
1,501cc to 2,000cc
*Prior to 2001/02, the “up to 1,500cc” band had been split to “up to 1,000cc” and “1,001cc to 1,500cc”
The higher rate paid for (up to) the first 4,000 qualifying miles in the tax year was meant to cover the fixed costs; the lower rate was based on the ongoing or running cost element.
This approach, backed up by the option to adopt a strict basis if it were more equitable, changed radically with Finance Act 2001, to apply from 6 April 2002.
In its Budget Day 2000 Press Release, the government had mentioned that the Inland Revenue would consider how the Authorised Mileage Rates for drivers who used their own cars for business journeys (which underpinned the Inland Revenue’s Fixed Profit Car Scheme) might be improved, “on a revenue neutral basis, to send better environmental signals”.
And so, FA 2001 s 57 introduced a new statutory basis for employers to pay at (or up to) new Approved Mileage Allowance Payment rates, (AMAPs), and for employees to claim corresponding Mileage Allowance Relief (MAR) for any shortfall, being then-new ICTA 1988, ss 197AD, 197AF, and 197AG.
Mileage rates for 2002/03 (the first year of the “new rules”)
Up to 10,000 work miles - Higher Rate
Over 10,000 work miles - Lower Rate
Any – engine size no longer distinguished
*This is not the current rate – see Budget 2011 Developments below
Reimbursements exceeding these approved rates would be subject to Income Tax and potentially NICs as well (there is a quirk in NICs that pay periods are calculated in isolation, so an annual threshold or band does not ‘work’ for weekly- or monthly-paid NICs – NICs apply only to reimbursements exceeding the higher rate, regardless of the extent of business mileage, as per the National Insurance Manual at NIM05833 – although you might have to read it more than once, to deduce what HMRC appears to be struggling to explain).
The new AMAP rates harmonised the previous FPCS rates at broadly the “up to 1,500cc” mark of 2001/02 (as per the previous table) – but notably increased the step-down point from 4,000 work miles to 10,000 work miles in the year (albeit it would save only £200 tax, for a Basic Rate taxpayer).
And of course those employees with larger-engined cars would lose out, given the scale of the reduction compared to the rates for capacities exceeding 2 litres in previous years. The essential logic was confirmed in April 2001:
“There is… no incentive to downsize by explicitly being more generous to cars under 2000cc and less generous to those over 2000cc in terms of reimbursement. However running costs per mile will often be relatively higher for larger cars than smaller cars and the new AMAPs regime will not make any allowance for this. There is therefore a limited incentive to downsize.”
Applying a universal approach to reimbursing work mileage regardless of engine-size (or any other criteria) was a significant and potentially quite useful simplification. But the downside was that there would be a great many people for whom these one-size-fits-all rates were not that accurate.
The phrase “revenue neutral” does not mean that individual taxpayers are not affected overall, but that the net tax yield to the Exchequer remains stable. In fact, in its Impact Assessment of April 2001, the government predicted that of the roughly 3million people using their own cars for work, there would be a little over 1.5million ‘winners’ under the new regime, balanced by just under 1.5million ‘losers’. (And the size of the ‘winning camp’ is one reason why it could be argued that, when it came to motoring expenses, “reimbursement” could also mean a “profit from employment”, and even earnings. At least, it might have done, over twenty years ago.) Why does this matter?
It matters because, to make sure the ‘losers’ couldn’t wriggle out of a regime that had become unfair to them individually – to keep the exercise revenue neutral and therefore ‘fair’ to the Exchequer – the government abolished the original strict method of tax relief based on actual costs when it introduced the AMAPs / MAR regimes in FA 2001.
Access to Capital Allowances to recognise the fall in capital value of the vehicle was withdrawn by FA 2001 s 59. And by pure blind chance, personal tax relief for the finance costs of buying a car (ICTA 1988 s 359(3)) relied on those very same reliefs (Chapter 3 of Part 2 of CAA 2001) that FA 2001 s 59 had just revoked.
So, two key statutory tax reliefs for employees who used their own car for business purposes were withdrawn. But only one – the capital cost of the car – would be offset by the new Approved Mileage Allowance Payments regime.
Remember that finance costs – loan or HP interest, etc. – were never a component of the FPCS calculus on which the new rates were based, so there was no justification for losing access to that tax relief as well, when buying a car used for business from 2002, except perhaps that it kept things simple and happened also to save the government money. We consider the curious curtailment of interest relief in more detail separately, in Motor Expenses and Mileage Claims: Can You Claim Finance Costs?
Remember also that employed taxpayers in particular have to fight HMRC tooth and nail for every penny of personal tax relief, given how unfavourably stacked are the legislative odds when it comes to expenses in employment. In that context, it might be astonishing that the government would permit HMRC to turn its back on the fundamental principle that taxpayers should get relief for their genuine costs, as carefully and comprehensively established over many years.
So, how can this be justified? Well, there is the environmentally-friendly gloss to the whole manoeuvre – i.e., that the new regime would discourage larger and (presumably) higher-emission engines; although even the government estimated that the new mileage allowance regime would save only 2,000 tonnes – yes, you read that correctly – 2,000 tonnes of CO2 emissions a year .
More generally, it can be justified to taxpayers only on the basis that the net cost per person is relatively modest, and that it includes a decent margin in favour of the taxpayer – the chances of a taxpayer being seriously out of pocket should be pretty slim.
(Of course, as a cynic, I would argue that such justifications are also mere gloss: the real point of the exercise was to make the Inland Revenue's job much easier, so that it would not have so many P11Ds and personal claim forms to process.)
And, at first glance, significantly widening the band at which the higher mileage rate is paid would seem to add a decent buffer. Except that, running up to the introduction of the new regime, the Inland Revenue had already figured out that almost 80% of employees in receipt of mileage expenses drove fewer than 4,000 work miles a year, so granting an extra 6,000 work miles at the higher rate of 40pence per mile would make no difference to that vast majority. To emphasise: the government and the Inland Revenue were well aware that c80% of employees using their own cars for work were covering no more than 4,000 work miles a year. So extending the higher starting 40p rate from 4,000 to 10,000 work miles was useless to almost 80% of employees using their own car for work.
Playing the Long Game..?
It could be said that HMRC has a rather unfortunate habit of not updating limits and thresholds unless it is forced to do so. From HMRC’s perspective, if it can stand its ground for long enough, the ultimate win is eventually to convince HM Treasury and then taxpayers that some de minimis threshold has become more trouble than it is worth and should be withdrawn – et voila! – another simplification is born.
This is exactly what happened with the old £8,500 reporting threshold for many Benefits in Kind: certain benefits used to be taxable only on “higher-paid” employees - they were not chargeable for lower earners. The threshold for “higher paid” was frozen in 1979 at £8,500; in 1979 the average weekly wage in the UK was less than £100, so £8,500pa represented roughly twice the average UK salary… but not so much when it was finally abolished nearly 40 years later as “part of a package aimed at simplifying the administration of employee benefits and expenses”, effective from April 2016 when median annual earnings were nearly £30k (FA2015 s 13, Sch 1, with reservations for Ministers of Religion and certain carers’ costs). Now everybody can be taxed on benefits in kind, regardless of whether they are higher- or lower-paid! Hurrah!
Another example is the £30,000 de minimis (exemption) for termination payments on redundancy, etc., under what is now ITEPA 2003 s 401 et seq. It was £10,000 in 1978, rising over the next decade to £30,000 by FA 1988 s 74, amending ICTA 1988 s 148; it has stayed at that level in the 30+ years since – except HMRC floated the idea in 2015 of withdrawing the £30,000 threshold in its current form, possibly in favour of an exemption applicable only to statutory redundancy payments..? Even though the statutory payment rates themselves had of course risen between 1988 and 2015, they were very much lower than £30,000 so this "simplification" was too much to swallow, and HMRC was less successful here: the £30,000 exemption remains, for now, albeit in more restricted form (NICs aligned, etc.) But HMRC just needs to bide its time: give it another decade or so, and – so long as it can keep the threshold at £30,000 – that too may well end up “simplified” into oblivion.
HMRC would no doubt argue that it does only what it is told to do by HM Treasury. And the consultation on "reform" of termination payments was actually in response to work done by the Office for Tax Simplification. (This reminds me: I wonder if the OTS has yet twigged that, in HMRC’s eyes, “while all simplifications are equal, some simplifications are more equal than others”? We also know that HMRC can certainly “nudge” when it wants to.)
But an early bath was not to be the fate for the mileage payments regime – leastways not in its early years – thanks to a very unlikely hero…
Budget 2011 Developments
The then-Chancellor’s Budget Speech of 23 March 2011 included the following:
“The price of petrol has become a huge burden on families. In the last 6 months, the cost of filling up a family car such as a Ford Focus has increased by £10.” [Wow: that much. In six months, you say..?]
...I am… proposing to increase the Approved Mileage Allowance Payments. This mileage rate has not increased at all since 2002, making those who depend on their car for work increasingly worse off.
It will now increase from 40 pence to 45 pence per mile.”
The Statutory Instrument SI 2011/896 The Approved Mileage Allowance Payments (Rates) Regulations 2011 were duly made, and came into force on 6 April 2011. The initial rate rose from 40p per mile to 45p per mile for the first 10,000 work miles in the tax year, but the lower rate for 10,000+ miles stayed at 25p per work mile.
(As an aside, the Budget 2011 Speech also introduced the “Fair Fuel Stabiliser” mechanism, which basically applied significant additional tax on oil and gas production’s runaway profits, so it could then be used to reduce fuel duty costs for the motoring public. Eleven years later, the government appears to have forgotten how this works.)
What Has Happened to Motoring Costs Since 2011?
At the beginning of the article, we noted that the price of second-hand cars had increased by almost 30% in 2021 alone.
The Office of National Statistics publishes an inclusive data series on Motoring Expenditure across fixed and running costs, where the baseline (100) was January 1987. At March 2002, when the AMAPs rates started to apply, the Index stood at around 180. It was fairly static for a number of years, rising slowly until around 2008 where the turbulence of the Global Financial Crisis took hold.
By the time of the Chancellor’s 2011 Budget statement in March 2011, the Index stood at c240 – an increase of around 33% on the 2002 figure. It would seem that the then-Chancellor’s decision to increase the mileage rates was strongly justified.
Since then, the Index of Motoring Expenditure held firm at around 240 until mid-2017, whereupon it started to rise again – initially at a fairly steady pace, but streaking upwards from early 2020 to hit an all-time high of 313 by March 2022. (To be clear, the Index includes a basket of motoring costs, so does not track only fuel. Also to be clear - it's still rising.)
In other words, by the time of the 2022 Budget we had seen a cumulative rise of a further c33% when compared to the last Budget adjustment in 2011 – and which is almost double where we were in 2001 – but 2022’s Chancellor refrained from making any adjustment to the mileage rates for tax purposes.
Thanks to the legislative changes made in 2001, there is no alternative claim to make: no matter how expensive real motoring costs actually get, employers cannot reimburse motoring expenses at higher rates without triggering tax and likely NICs; meanwhile, employees cannot claim direct tax relief for anything more than the difference between the HMRC approved rates, and the amount that employers actually reimburse, if less - no matter how large their genuine work-related motoring expenses actually are.
It might help if we took a step back and looked at this in context. And with another cynical eye.
The average taxpayer might think that HMRC’s role is to assess the correct amount of tax and to ensure that it is collected. It could instead be argued that HMRC’s main focus over the last 20+ years has been offloading its processing, assessing and collection responsibilities onto the population it is supposed to serve. Whether it is in the guise of “efficiency”, “cost-cutting” or “simplification”, the outcome tends to be the same: the taxpayer takes on proportionately more of an ever-increasing burden of complying with tax legislation, while HMRC looks for opportunities to create, to spot and to penalise “compliance failures” - don't just take my word for it: read the tribunal judge's comments in McGreevy v HMRC  UKFTT 0690 (TC); the new CGT regime merely hangs on the coat-tails of the fiasco that is ATED returns - most of which seem likely to be submitted only to claim that no tax is actually due. (Does one need to mention Self Assessment? Making Tax Digital? Do you really think that HMRC would let the government spew out all that anti-avoidance legislation every Finance Act or so if it actually fell to HMRC, rather than the taxpayer, to take primary responsibility for it?)
The changes in FA 2001 to introduce a universal Mileage Allowance regime, but withdrawing the employee’s choice to make a “strict” (but accurate) claim, represented a tectonic shift away from a fundamental premise of taxation policy: the employed taxpayer being able to claim tax relief for (only and exactly) whatever costs had actually and “legitimately” been incurred for qualifying work purposes.
The argument that putting a standard Mileage Allowance into legislation was a simplification to benefit the taxpayer, does not explain why the government also removed the taxpayer’s option to apply the more accurate, more equitable but more time-consuming “strict” basis of relief at the same time. But that decision is explained by the then-Inland Revenue’s priority of reducing its own processing manpower requirements, - avoiding all those taxpayers' personal claims - while ensuring that the government could not lose out financially, even if the AMAPs rates were ever found to be wanting (say, 20 years later). If and where using the now-standardised AMAPs rates did make taxpayers’ and employers’ lives easier, this was just a coincidence.
This is part of a trend discernible even in the quite narrow field of employee expenses. Finance Act 2015 s 11 introduced ITEPA 2003 s 289A, as a “simplification” of the previous rules, from:
Employer P11D “these are the expense payments - travel, hotels, meals, etc. - to employee X”;
Employee X: “this is my corresponding personal claim that £a were incurred for work”
Employer P11D “these are the net taxable expense payments to employee X, after deducting any work-related parts they would previously have claimed themselves”
Employees could now relax, as they did not have to keep making annual personal claims. But employers now have to stand in their employees’ shoes, to work out what the employee would, up until that point, have been able to claim only on a personal basis. I am not sure that, even now, most employers actually appreciate the underlying legislative and procedural gymnastics that the new “simplified” regime requires of them. Between employer and employee, "simplification" simply meant moving the burden from employee to employer. After this drive-by legislation, I am not even sure you can call it a “tax triangle” any more. But who cares? HMRC now has even fewer P11Ds and corresponding employee tax claims to process, so everything is peachy. See how "simplification" really works now?
I suggested earlier that the government was able to get away with abolishing the strict basis for motoring expenses in 2001 – the most accurate and fairest basis – only because, at the time, the vast majority of taxpayers were satisfied that they would not lose out - or not by enough to get upset about, at least.
Based on the government’s own figures for motoring expenses, we are within touching distance of motoring costs in 2022 being double what they were in 2001 when the AMAP rates were introduced (and they are already a third higher than they were in 2011, the one and only time they were tweaked).
But I suspect also that a higher proportion of employees are using their own vehicles for more or longer work journeys than they were 20+ years ago. I very much doubt that the c2001 statistic that “almost 80% of affected employees cover 4,000 work miles a year or less” will still hold good. I fear that there is a lot of quite insecure – and poorly paid – employment, that orients around clocking up a fair few motoring miles in one’s own car, etc.
In other words, not only are the old (current) rates likely to be too low, but they are likely to be too low, for many more employees than in 2001.
To put things into perspective, HMRC had been fretting for years over the rising menace of flexible salary sacrifice, or “Optional Remuneration Arrangements”. The government duly introduced measures in FA 2017 Sch 12; the corresponding Tax Information and Impact Note (TIIN) published on 5 December 2016 estimated that the measures would affect around 1million employees and counter an average tax risk of c£200 a head. If there were 3million employees using their own car for work twenty years ago then, even if the number of such employees has not increased since, it would seem that we should not have needed to witness so great a rise in motoring expenses as to warrant a great deal of fretting by HMRC. Assuming HMRC cares as much about charging only the right amount of tax, as it does about protecting tax revenues to the Exchequer.
Option 1 Of course the fairest thing would be to allow employees the option of making a strict “actual costs” claim for their work mileage: that way, their claims will align with the true cost of business motoring, no matter how bad that gets. This is of course an option that has remained largely open for most self-employed taxpayers throughout the last 20 years.
And, of course, there is absolutely no way that HMRC will allow employees to go back to the future, and risk that it may actually have to process a huge number of such "actual costs" claims. (On the one hand, it would actually be relatively easy for HMRC to set up an online portal with a basic template to process such claims automatically; on the other, it would mean HMRC having to take back partial ‘ownership’ of something it managed to offload roughly twenty years ago. And, once you open the Pandora’s Box labelled “Let’s help Taxpayers”, where would that end?)
Option 2 The more straight forward alternative is for the Chancellor to belatedly announce a further increase in the AMAPs rates. This should be easy, because it requires little more than a Statutory Instrument, as we have already seen. The real peril for HMRC in this option lies in its putting together the corresponding Tax Information and Impact Note (TIIN) alongside that Statutory Instrument that reveals how much the increased rates will cost the Exchequer in lost tax revenues, as the flip side of that improved tax relief – an Impact Note that we would find credible, that is. Having seen some of the garbage HMRC has pushed out to justify Making Tax Digital over the years, I have more faith in unicorns than in HMRC’s TIIN calculations.
Option 3 There is perhaps another option, which is to play that long game one more time, so that HMRC and the government sit on their wringing hands for another decade or so, until AMAPs/MAR mileage claims become so worthless in real terms that the ever-useful OTS then suggests they too might as well be abolished – another win for “simplification”, thirty years in the making.
I don't think this is necessarily as far-fetched as it might at first appear. The current cost profile for 100% electric vehicles means that they are very expensive to buy, but relatively cheap to maintain and very cheap to charge - typically overnight on "off-peak" rates (although I do wonder for how long they will remain "off-peak", as demand and costs rise). So the actual cost of covering business mileage in an electric vehicle is very low, while the up-front cost is eye-wateringly high. While we're all heading electric, HMRC could be tempted to conclude that there is no point in trying to work out a standard mileage threshold to absorb some of that capital cost of a privately-owned vehicle, when different employees cover wildly different business mileage for a given year, and the potential "wins" or "losses" are too extreme to derive a useful average. It is not that much of a leap then, to saying "it's too hard to work out and stay revenue-neutral, so let's keep things simple and just not bother with mileage relief any more - it's only really costing employees tuppence per mile anyway".