Who’s entitled to tax-free mileage allowances?

The impact of the Coronavirus pandemic is going to affect businesses and business decisions for years to come, but some may be very timely. For example, what do you do if the lease on your company car has ended but you’re delaying a new contract until your business recovers from the lockdown? Meanwhile you’re borrowing your other half’s car when you need to travel for work. Can you claim a tax deduction for this?

 

Mileage allowance or deduction

You probably already know that if you own a car, motorcycle or bicycle and use it for business journeys you can be paid a tax and NI-free allowance by the business. Alternatively, if no allowance is paid to you, or it’s less than HMRC’s approved mileage rate, you can claim a tax deduction. The following examples show how this works.

Example 1. Jim is a director of Acom. He uses his privately owned car for business journeys. Acom pays Jim 45p per mile, which is HMRC’s approved rate (for annual mileage up to 10,000 per tax year). The payments are exempt from tax and NI. The rules prevent Jim from claiming a tax deduction for the actual car costs he incurs even if they exceed the mileage allowance he receives.

Tip. There is nothing to prevent Acom from paying Jim more than HMRC’s mileage rate, however the excess will be taxed as a benefit in kind and liable to Class 1 NI (employers’ and employees’).

Example 2. Acom paid Jim 30p per mile. This is tax and NI exempt as it’s less than HMRC’s approved rate. And, because it is the rules entitle Jim to a tax deduction of 15p per mile, i.e. the difference between HMRC’s rate and the payment he received.

Tip. If you’re the owner manager of a company and use your car (or other vehicle) for business journeys, the most tax and NI-efficient option for you and your company is for it to pay you the maximum approved mileage allowance allowed at HMRC’s rates rather than for you to claim an equivalent tax deduction.

No correlation to expenses

As we’ve already mentioned, the tax and NI-free mileage allowance or equivalent tax deduction can’t be increased to account for higher costs, but equally it is not decreased where your expenses are less. Neither do the rules require that you pay the running costs of the car (or other vehicle) for which the allowance is paid or deductions claimed. This means if you borrow a car from. say, your spouse or a friend, and use it for a qualifying business journey you are entitled to a mileage allowance or deduction.

Tip. The position is no different if you are temporarily using a hire car or one provided to you as a courtesy car by a garage or insurance company.

 

Paying for the use

If you borrow a car for business journeys and pay the person you borrowed it from there are no tax or NI consequences for you, and there are unlikely to be any for the person you pay. Unless HMRC can show that the other person intended to make a profit from the arrangement they aren’t liable to tax on what you pay them. Even if it was their intention to make a profit, they would be entitled to claim a tax deduction from the amount they receive for a proportion of the costs of owning and running the car. Alternatively, they could claim the trading allowance (TA).

The TA exempts £1,000 of trading or miscellaneous income per year and is available to most individuals.

So in summary, although you may incur no cost for borrowing a car you can claim a tax deduction at HMRC’s approved rate even if the car is owned by someone else. Alternatively, your company can pay you a tax and NI-free mileage allowance, also at HMRC’s approved rate, instead.

If you need any further help or advice relating to this or any other tax matter, do not hesitate to contact us – we specialise in tax matters.

Recent Articles

HMRC Investigations

HMRC InvestigationsAs HMRC start their investigations on business's who have had coronavirus support, you need to know your rights and obligations if your business is picked out for a compliance check. HMRC will be ramping up the checks and investigations for the next...

read more
What’s new with pensions?

What’s new with pensions?

What's new with pensions?As we are now two months into the new tax year, it's the right time to get up to speed with the changes to auto-enrolment and workplace pensions. The lifetime allowance has been frozen at £1,073,100.00 for the tax years 2021/22 - 2025/26. This...

read more
New tax year, new tax code

New tax year, new tax code

New tax year, new tax codeAs the 2021/22 tax year has begun, HMRC have been issuing new tax codes where applicable. The personal allowance has increased from £12,500 to £12,570. A a result, it is necessary to update employee tax codes for the new tax year - 1257L....

read more
Practice Update – April 2021

Practice Update – April 2021

Practice Update - April 2021With a new tax year has upon us we would like to take this opportunity to update you all with some exciting changes within the Adderley, Hill & Co Team. The team will be back in the office full time as of Monday 19 April 2021. We hope...

read more
Tax Year End – 2020/2021

Tax Year End – 2020/2021

Tax Year End - 2020/2021On the 5th April 2021, we will see another tax year pass. So before it does, we wanted to bring some topics to your attention that may be useful. Things to consider doing before the tax year end 5th April 2021; Annual inheritance tax gifts...

read more
Budget 2021

Budget 2021

2021 Budget Update As many of you may be aware, the 2021 Budget was announced yesterday. 3 March 2021 and we wanted to highlight some of the key points that were mentioned. Extended Furlough Scheme / Self-employment scheme The Furlough Scheme has been extended to the...

read more
Local Restrictions Support Grant (For Closed Businesses)

Local Restrictions Support Grant (For Closed Businesses)

Recent Articles Local Restrictions Support Grant (For Closed Businesses) The government have announced that businesses that have been required to close due to local restrictions may be eligible for the new Local Restrictions Support Grant (LRSG). This means that...

read more
Claim Tax Relief For Working From Home

Claim Tax Relief For Working From Home

Claim Tax Relief For Working From HomeIf you have to work from home on a regular basis for either all or part of the week, you may be able to claim tax relief for additional household costs.  This includes if you have to work from home because of COVID-19, but isn't...

read more
Practice Update – October 2020

Practice Update – October 2020

Practice Update - October 2020 TEAM CHANGES We are very sad to announce that Jared, our Trainee Accountant, will be leaving Adderley, Hill & Co at the end of the October 2020. He has been a valued part of the team and with us for over 3 years, joining us fresh...

read more
14 Day Quarantine – Employers Responsibilities

14 Day Quarantine – Employers Responsibilities

14 Day Quarantine - Employers Responsibilities If an employee wants to travel to a country that isn't on the governments travel corridor list for a holiday, they will need to self isolate for 14 days on their return. Travel corridors are countries that you can travel...

read more