Businesses generally use ‘private mileage deduction’ schemes to avoid having employees pay benefit in kind tax when using company cars for their private journeys. Below, we will see why these schemes are far from ideal and what alternatives you should take into account to manage mileage expenses.
Those who drive for work are often provided with a company vehicle that they can also use for private journeys. However, unless the employee pays for the fuel themselves, HMRC considers their private mileage to be a taxable benefit in kind.
Because of this, many employers have set up private mileage deduction schemes to avoid having employees pay benefit in kind tax. These generally work as follows:
- John, the employee, uses a company car for private trips
- John pays for the fuel expenses using his employer’s company fuel card
- John’s employer deducts fuel expenses from his salary
Here is an example of how to calculate the private mileage deduction amount using HMRC’s Advisory Fuel Rates:
Private mileage deductions – a case study
John drives a company car with a 1400cc petrol engine. It’s 1st May and he has used his company car to drive 300 miles for private trips during April.
John’s employer multiplies the AFR rate with the number of miles he drove to calculate his private mileage deduction which came to £36.
If John’s monthly gross salary is £3000, his salary in May will be £2964 (£3000 – £36).
Please bear in mind that his £3000 salary is still fully taxable for PAYE and National Insurance purposes.
It sounds simple enough. So what’s the problem?
This may seem simple and fair, but, in practice, it isn’t so straightforward. Employers usually have to trust that their employees have accurately declared their private mileage, with no way of checking if the numbers are correct.
In addition, employees may inevitably forget to record every private trip they make, especially as it’s time-consuming and invasive to manually record and share information about every journey.
For example, let’s say that John was in a rush when he filled out his mileage claim so he only declared 150 of the personal miles he drove in April, forgetting 150 miles. Because of his mistake, his salary deduction would have totalled £18 rather than £36.
This can cost your business a considerable amount of money over time, especially if many of your employees drive for work. In fact, 90% of company car drivers have admitted to having submitted inaccurate mileage claims, which has cost companies millions.
Moreover, HMRC can decide to inspect your business and penalize you for any inaccuracies. These penalties can go as high as 6 digits if HMRC finds that your business mileage records are not kept adequately.
How can I avoid private mileage deductions?
Many employers have moved away from these type of schemes and opted instead for business mileage deduction schemes, effectively reversing private mileage deductions.
This means that rather than employers paying for fuel via fuel cards or the like, employees pay for all of their fuel, both business and private. Employers then reimburse the amount spent on fuel for business trips in the form of a business mileage claim, as we can see in this example.
In the past, this was never a feasible way to calculate the private use of company vehicles but, with emerging technology that automates the mileage claim process, it has fast become the method of choice.
Business mileage claims can benefit you and your employees in a number of ways, for example:
- By improving the accuracy of mileage claims
- By removing the cost associated with fuel cards
- By ensuring HMRC compliance
- By improving transparency across the entire company
Additionally, drivers enjoy more privacy as they no longer have to record all their private trips. As the process is automated, they also save time logging mileage which they can redirect on more important tasks.
Is there any solution that supports a transition from private mileage deductions to business mileage claims?
Here at Autotrip, we’ve developed a solution that helps you keep track of your employees’ mileage expenses, regardless of whether you have private mileage deductions or business mileage claims.
Autotrip captures every trip employees make and our software calculates the mileage and VAT that can be claimed, allowing you to automate the entire process while moving towards a more manageable business claim structure.
Moreover, employees have the option to include only business trips in their claims, ensuring that their personal journeys are kept private and making it easier for the business to implement such a solution across the entire company.
Find out more at autotrip.com and see how we’ve recorded over 9.2 million miles and 565,000 business trips in the past year, saving our clients 1000s of hours that would have been otherwise spent logging mileage manually.
This is all great, but how can I learn more about mileage claims so I can make the right decision?
HMRC has many rules when it comes to recording business mileage and managing mileage claims. Reading through all the information on different websites can be overwhelming and confusing which is why we have put together a complete guide to mileage claims where we go through everything you need to know about mileage.