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.

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