9 out of 10 company car drivers in the UK admit to having submitted inaccurate mileage claims in the past, according to a recent survey by Flexed.
Inaccurate mileage claims can cost businesses in inflated expenses claims and also bring the potential for fines from HMRC. So how can businesses ensure mileage records are accurate?
Over 40% of all drivers don’t see inflating their mileage claims as ‘wrong’, according to Allstar Business Solutions, showing that those who drive for work with their own private vehicle are also liable to track their mileage inaccurately, rounding claims up, which can become costly to your business.
This comes as no surprise since logging miles can be an enormous hassle and extremely time consuming, especially when most companies don’t keep proper track of what travel expenses their employees incur.
The issue is that when a claim is found to be inaccurate, both the employer and employee are liable, and this can carry hefty tax penalties, making it even more critical to put in place a robust mileage policy.
So here are our five top tips for creating a foolproof mileage policy, one that is HMRC compliant and will fit your business’ needs:
1. Determine what counts as business mileage
Over half of all drivers in the UK are unaware of HMRC rules on reclaiming business mileage.
Although business mileage may seem simple at first, the lines between private and work-related journeys can often become blurred, does commuting to and from work count for example?
According to HMRC, business mileage is travel that employees make ‘wholly and exclusively’ for business purposes, such as:
- Trips needed to complete work, e.g. deliveries.
- Trips between two workplaces for the same job.
- From an employees’ home to a client.
- To a temporary workplace e.g. building site, client’s office.
On the other hand, HMRC has also outlined that ordinary commuting journeys or any sort of private journey doesn’t constitute business mileage, even if the employee runs a work-related errand along the way.
2. HMRC recommended rates are here to help
You can set your own mileage rates, but HMRC rates might be more beneficial as if you use their rates (or lower) the HMRC doesn’t require any tax to be paid on business mileage expenses.
These are the current rates for employees who drive a company car for business purposes, also known as Advisory Fuel Rates (AFRs): https://www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016
These are the current rates for employees who drive a private vehicle for business purposes, also known as Approved Mileage Allowance Payments (AMAPs): https://www.gov.uk/expenses-and-benefits-business-travel-mileage/rules-for-tax
3. Define your company’s mileage reimbursement rates
If you decide to pay a higher rate than the one recommended by HMRC, you will have to report this to HMRC using the P11D form. This is because the business will be required to pay the fuel benefit charge for providing their employee with free fuel.
Alternatively, anything the employer pays over the HMRC mileage rate can be added to the employee’s pay and be taxed the same as the rest of their income.
If you decide to pay less than the HMRC mileage rate. The business won’t have to report this to HMRC or pay tax. The employee can claim tax relief on the difference between the HMRC mileage rate and the rate paid by the employer, by filling out a P87 form or by submitting a self-assessment tax return.
In general, we suggest businesses reimburse using HMRC mileage rates because:
- If the employer chooses to pay the HMRC rates then they don’t need to prepare the P11D forms and employees don’t have to spend time filing tax returns.
- The HMRC rates also ensure that employees are being paid the full amount they can receive tax-free, while the employer can claim this as a business cost.
That being said, you have 3 choices when it comes to the period on which you decide to reimburse your employees:
- The employer reimburses the employees’ mileage using the HMRC mileage rates.
- The employee pays for the fuel and then claims the money back using the HMRC rates at the end of the tax year.
- The employee pays more income tax and national insurance to use the company car for both business and personal miles, which is the least optimal option from a tax perspective.
4. Use a mileage expense system that supports your policy
We suggest businesses adopt an automatic mileage expense system to simplify as much of the process as possible.
Some companies still use paper mileage log books or excel sheets, but these are significantly outdated and time consuming. You also run the risk of forgetting some to record all trips or losing some or all of the data – as mentioned previously these logs are often inaccurate or even fraudulent as they rely on drivers inputting all data manually.
This is why new automatic mileage tracking solutions, such as Autotrip, help businesses save time and money on managing mileage claims.
Instead of logging mileage manually, drivers can fit a plug & play tracker into their car, which automatically runs in the background and captures every single mile driven – leaving less room for over-exaggerated claims and human error, whilst also ensuring HMRC compliance.
Together with the tracker, drivers have access to an app where they can classify trips as business or private trips (visible only to them to respect their privacy).
Automatic mileage tracking solutions make life much easier for your business as well as your drivers as claims can be reviewed and approved quickly then safely secured in the cloud.
Ultimately, these tools make mobile workforces more productive, helping drivers spend less time on mundane admin tasks whilst allowing businesses to reimburse drivers for the correct mileage without worrying about compliance.
5. Store mileage records safely
Your business must also keep mileage logs for at least 6 years, which is no easy task – 93% of SMEs would fail an HMRC mileage inspection because they don’t keep adequate records.
Without reliable records, HMRC may disallow your mileage deduction and even impose potential fines that can reach up to 6 figures. These are the minimum mileage log requirements that you should keep for each business trip:
- The dates and times of the trip
- Start and end addresses and the mileage travelled
- Reason for the journey and amount claimed
About the author
This article has been exclusively written for Bytestart by James Finlayson, MD and Angel Investor of Autotrip, the UK’s leading mileage expense system.
More help on tax and money matters
For more information and guidance to help you deal with the thorny subjects of tax, accounting and finance try some of our popular guides;
- 10 Tax-Saving Ideas for Small Business Owners
- Sole Trader Tax – A Guide for Start-Ups and the Newly Self Employed
- 10 Things Savvy Entrepreneurs Do to Reduce Their Tax Bills
- A Guide to Bookkeeping for New Business Owners
- Thinking of Going Self-Employed? The Key Finance & Tax Points You Must Get Right
- Setting Up Accounts for a Sole Trader – A Beginner’s Guide