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Lee Sharpe looks again at Employee Motoring and Mileage Expenses, and the unfairness of statutory mileage rates that have not substantively risen for more than 20 years.

Introduction

Last year, I covered the rising cost of motoring and its tax consequences for employees using their own cars to travel for work, in some detail – see Motoring Expenses and Mileage Allowance – Are Employees Who Use Their Own Cars Getting a Bad Deal?

When I say "I covered it in detail", I mean over several pages, encompassing the history going back over more than 20 years.

To summarise:

HMRC (formerly the Inland Revenue) was positively drowning under employee motoring expense claims, so -

• A single-tier “statutory mileage rate” was introduced that employees could claim when using their cars on business trips – that was nice and straight forward, BUT
• It removed the employee’s standard right to claim tax relief for (motoring) expenses actually incurred (fuel, repairs, servicing, etc., on a pro rata basis)

In other words, employees had to claim using the new statutory mileage rate or nothing, from April 2002.

Cost of Motoring - Rising Well Above the Allowance?

Aside from some relatively extreme outliers, this was broadly OK back in 2002 as the rates had been carefully devised to reflect real-world motoring expenses incurred as recently as the previous millennium (I kid you not: the rates really are based on figures first introduced in April 1997, although they were fairly generously pegged to approximate the costs for larger, up-to-1.5 litre-engined cars, for 2002 onwards).

The Office for National Statistics’ Motoring Expenditure Index stood at 163.3, when those rates were first used in 1997.

That Index hit an all-time high of 332.1 in November 2022.

Those figures suggest that the average cost of motoring has literally doubled in the roughly 3 decades since those mileage rates were first used in anger. But the "tax-free" mileage rates enforced by HMRC are basically the same as they have always been:

And, yes, rates were increased slightly by 5p per mile for the first 10,000 business miles after a panic over rising fuel costs back in 2011 but, ironically, the rates back in 1997 had comfortably hit 45p per mile already – see our previous article.

Remember that, unlike the self-employed, employees have no choice but to use these rates, or suffer a tax penalty. No matter how high the cost of business motoring actually gets – and it has already doubled – these supposedly tax-neutral rates have been set in law. If a fair-minded employer tries to reimburse the employee at a more reaslistic rate, the employee will actually suffer a tax charge.

Does Government Care to Understand?

It seems that the Government realises that something is amiss: it issued several responses to Parliamentary Questions to reassure MPs and their constituents from March to August 2022.

Unfortunately, these statements were wrong, as they incorrectly said that employees could be reimbursed at more realistic rates – i.e., higher than those set in law – without tax charge. It fell to others, including the Institute of Chartered Accountants in England and Wales to point out that this was incorrect, and the maximum rate was (and remains) 45p per business mile.

And so Government issued a formal Written Ministerial Statement in September 2022, admitting its “technical inaccuracies” but then stating:

1. “Where an employer reimburses more than the Approved Mileage Allowance Payments rate, Income Tax and National Insurance are due on the difference…”and
2. “The Approved Mileage Allowance Payments rate exists to reduce the administrative burden on employers”.

Unfortunately for Government, I think neither of these statements is correct either since, by my reckoning:

1. There are no “Approved Mileage Allowance Payments” in the NICs legislation, because it has its own regime, which – newsflash – has only 1 rate, not the 2 rates that apply under the Income Tax regime above, and
2. The Approved Mileage Allowance Payment rate was not brought about to make lives easier for employers, but for HMRC. The old Fixed Profit Car Scheme worked basically the same for employers and employees before 2002, and the only party that really benefitted was HMRC, by abolishing an employee’s right to make “actual costs” tax claims (that HMRC had to process manually).

So Why the Resistance to Changing the Mileage Rates?

As I put in my previous article, I suspect that the main reason that there has been no change to the mileage regime(s) for so long is that such a change would require an official statement – a Tax Information and Impact Notice – and unless it is very carefully devised, employees may realise just how much they have been penalised over the years. That may not go down very well at all.