Car Capers

The Finance Act 2001 heralds substantial changes to the authorised mileage rates. ALLISON PLAGER reports.

The number of employees using their own cars for business purposes is increasing. The company car tax rules have swung to the extent that for many it is simply no longer a benefit to have a company car, so they are choosing (often encouraged or forced by their employers) to give up the company car and use their own vehicles.

Employers often use the rates authorised by the fixed profit car scheme to reimburse their employees' business miles, and where they pay less than the rates, the employee can claim tax relief on the balance in his or her tax return. This is a convenient, voluntary scheme which means that it is not necessary to keep detailed records of business motoring expenses. However, changes have been made to the arrangements by the Finance Act 2001 to form a statutory régime. Section 57 and Schedule 12 introduce new sections 197AD to 197AH and new Schedule 12AA to the Taxes Act 1988, and these exempt from tax and National Insurance mileage allowances paid for qualifying business travel.

New rules

Under the new régime, instead of using different mileage rates according to the car engine size, there will be one rate for all cars and vans, regardless of engine size. However, the lower rate kicks in after 10,000 business miles, which is considerably more generous than after the current figure of 4,000 business miles.

The idea behind the new régime is to provide an incentive to drive cars with smaller engines. Example 1 shows that drivers of such cars will certainly benefit regardless of their business mileage. Medium-sized engine car owners will also benefit if they drive more than 5,333 miles, which seems perhaps at odds with the Government's intentions. However, that amount of business travel is quite high, so it may be that not too many drivers with medium-sized cars will be better off. The only group of drivers who lose out totally are those driving cars with engines over 2,000cc. They are substantially worse off regardless of the number of miles they drive.

Cyclists of the pedal and motor variety are famously not left out. These were introduced first for 2001-02 at 12 pence a mile for bicycles and 24 pence a mile for motor cycles. The rates for 2002-03 see an increase for bicyclists to 20 pence a mile, with the rate for motor cycles not changing. Whether or not the mileometers which will need to be attached to most pedal bicycles will attract tax relief is not mentioned, but seems unlikely!

The new Schedule 12AA sets out various definitions relating to new sections 197AD to AH.

Old dispensations

The introduction of the new tax exempt mileage allowance payments render dispensations in relation to expenses mileage payments and benefits unnecessary. So any dispensations issued before April 2002 will have no effect in relation to business travel in an employee's own vehicle. The dispensation may still relate to other expenses and benefits, and therefore continue to have effect in their respect.

Relief

Where the employer does not make any mileage payments or the total paid is less than the statutory amount, section 197AF entitles the employee to mileage allowance relief. The amount of the relief is either the approved amount for the applicable mileage allowance payments or the difference between the total amount of payments already made by the employer and approved amount available.

Employees will no longer have the option of claiming actual motoring costs from 6 April 2002, as the new régime is statutory.

Capital allowances

Another casualty of the new scheme is the right to claim capital allowances in respect of a privately owned car used for business travel, which employees could claim instead of the authorised mileage rates. This will no longer be possible, and from 2002-03 they will have the right only to claim the new statutory mileage relief. Section 59 of the Finance Act substitutes a new section 36 in the Capital Allowances Act 2001 not allowing expenditure by an employee or officeholder to qualify for capital allowances. Ownership is deemed to end for these purposes on 5 April 2002.

Likewise, despite some initial confusion, it has been established that relief for loan interest to purchase a car will also not be available beyond that date.

Multiple employments

How does the 10,000 mile test apply to those with multiple employments? The answer is provided by paragraph 4(2) of Schedule 12 which allows the higher rate of mileage allowance for the first 10,000 miles of business travel 'in relation to the employment and any associated employment'. Employments are associated if they are with companies or partnerships where one controls the other. They are also associated where the employers are associated companies as defined in section 416, Taxes Act 1988; presumably this applies only to close companies since section 416 is littered with terms which are relevant only to close companies. Any employee who, by unfortunate chance, worked for both the companies concerned in the Newfields Developments Ltd case would no doubt be surprised to find that only one 10,000 mile limit is to apply to both employments.

Where the employee with two employments claims mileage allowance relief, all the same terms and definitions apply and so he or she must operate the 10,000 mile threshold himself. In a close company situation, it may be doubtful whether the employee has sufficient information to know whether two companies are associated within the meaning of section 416, so that he should be restricting his (or her) mileage relief claim if total business mileage exceeds 10,000 in the year.

Mileage allowance relief is not a deduction from general income, or even a deduction from Schedule E income. It is deductible from the emoluments of the particular employment to which it relates. No apportionment provision is included in the legislation, so presumably the employee can allocate his first 10,000 miles of business travel to whichever of his associated employments suits him best.

Get the bus!

Green commuting is an elusive concept, but one which the Government is keen to promote. Works bus services are one way of serving that purpose, and to that end section 48, Finance Act 1999 introduced section 197AA, Taxes Act 1988 removing the tax charge under section 154 in respect of the benefit of a works bus service from 6 April 2002. The minimum number of seats allowed then was 12, so section 60, Finance Act 2001 has been introduced reducing this number to nine. The aim was to make it easier for small employers to take advantage of the tax exemption.

Thus any employee, who travels free or at a subsidised rate in a qualifying works bus to and from work, will not be receiving a taxable benefit. In the interests of safety, the legislation decrees that the exemption will apply only to vehicles originally constructed to carry at least nine passengers.

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