Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Replies to Queries - 2 - Owners, drivers and tax free payments

28 August 2002
Issue: 3872 / Categories:

We have several employer clients who have decided that it is no longer tax-efficient to provide company cars to their employees.

The provision of a company car has been replaced by an increase in salary and this is topped up by tax-free mileage payments made within the Inland Revenue authorised rates.

When company cars were provided, it was not unusual for an employee to use another employee's company car. This practice has continued with the personally owned cars.

We have several employer clients who have decided that it is no longer tax-efficient to provide company cars to their employees.

The provision of a company car has been replaced by an increase in salary and this is topped up by tax-free mileage payments made within the Inland Revenue authorised rates.

When company cars were provided, it was not unusual for an employee to use another employee's company car. This practice has continued with the personally owned cars.

In these circumstances the company would like to make a payment in line with the authorised mileage rates to the owner of the car.

We have asked the Inland Revenue if these payments can be made tax free and they have advised us that they cannot. The reason given is that payments can be only be made when employees are using their own car.

On a review of the legislation it would appear that the only qualifying condition for the car is that it must not be a company vehicle.

Readers' views on whether the Inland Revenue is correct in their analysis of the legislation would be most welcome.

(Query T16,065) - Abbey.

It seems to me that 'Abbey' approaches this issue from the wrong direction. The correct recipient must first be identified. Mileage allowances to employees using 'qualifying vehicles' are tax free, provided all the requirements of the legislation are met. A qualifying vehicle is identified in paragraph 3(2) to (5) of Schedule 12AA to the Taxes Act 1988 as being a car, van or motor cycle, subject to an upper weight limit; section 197AD(2), Taxes Act 1988 defines mileage allowance as payments paid to an employee in connection with the use by him for business travel of a qualifying vehicle (my italics). Where mileage payments satisfy both requirements, there is no charge to tax. 'Abbey' will be aware of the statutory mileage rates and limits. It is correctly identified that the vehicle must not be a company vehicle.

The tax exemption only extends to payments to an employee for the use by him of his car. It does not extend to payments to an employee for use by a fellow employee of his car. Payments of mileage allowance to the car owner are not in respect of journeys made by him. Accordingly the payments will be taxable. As an aside, I wonder whether their insurance policies cover this situation. Certainly my experience was that an insurance company would not extend cover in these circumstances. 'Abbey's' clients may be exposing themselves to liability if an employee has an accident in a colleague's car if insurance does not cover that situation; certainly they have a duty of care to establish that their employees have proper insurance.

However, reversing the situation does not give rise to taxable emoluments. Provided mileage allowances are paid to the driving employee then, subject to satisfying the statutory limits, the amount will be tax free. There is no requirement for the vehicle to be owned by the employee receiving the mileage allowance, merely that it is not a company vehicle. Over a period, matters may even themselves out so that no employee gains significantly, but if the employees have a private arrangement to hand over the mileage for the use of their colleague's car that would not seem to cause a problem. So far as 'Abbey's' client is concerned, they must be seen to pay any mileage allowances to the person who does the driving. Alternatively tax must be deducted from this element of the mileage payments. - Flipper.

Looking at the legislation, I am not sure that either 'Abbey' or the Inland Revenue is correct. Having said that, I think that the legislation gives a result that is unexpected. I will refer to the Taxes Act 1988 references even though the legislation was introduced by Finance Act 2001.

Section 197AD(1) states that there is no Schedule E benefit in respect of approved mileage allowance payments in a qualifying vehicle. Section 197AD(2) then goes on to say that mileage allowance payments are amounts paid to an employee 'in respect of expenses in connection with the use by him for business travel of a qualifying vehicle'. The next subsection states that mileage allowance payments are approved only if total payments 'made to the employee for the kind of vehicle in question' do not exceed the amounts 'applicable to that kind of vehicle'. That part of the legislation is designed to make sure that the individual does not obtain two lots of 10,000 miles by changing the car, but it does mean that payments are not restricted to the one car only.

We are then left to look at some definitions. Schedule 12AA to the Taxes Act 1988 simply describes a qualifying vehicle by reference to what it is and not who owns it. To that extent, 'Abbey' is correct and the Inland Revenue is wrong. It would seem that someone can obtain allowances for using any car for business travel, but what is business travel? It is, according to paragraph 2 of Schedule 12AA, 'travelling the expenses of which, if incurred and defrayed by the employee in question' would be allowable travelling expenses. Who is the employee in question? It would seem to be the one using the car, since there is no link to ownership. As a result, it seems that it is the employee using the car who is entitled to the tax-free allowance.

Perhaps the Inland Revenue might counter that the result is absurd because the employee using the car has not incurred any expenditure, but was it not the Government which said that there was no longer a link between fuel costs and the mileage rates? - JWG.

Extract from reply by 'Snark':

The Revenue's advice is correct. In the circumstances envisaged, payments to the employee will not be tax free.

The only relief, available to an employee using his own car in the course of his work, is through the new rules contained in sections 197AD to 197AH of, and Schedule 12AA to, the Taxes Act 1988. I fear that 'Abbey's' review of the legislation cannot have been very thorough when he says that 'the only qualifying condition … is that the [car] must not be a company vehicle'.

Business travel is clearly defined in paragraph 2 of Schedule 12AA as: 'travelling the expenses of which, if incurred and defrayed by the employee in question out of the emoluments of the employment, would (in the absence of sections 197AD to 197AF) be deductible under section 198(1) (general relief for necessary expenses)'. Mileage allowance payments are defined in section 197AD(2) as: 'amounts … paid to an employee in respect of expenses in connection with the use by him for business travel of a qualifying vehicle'.

The emphasis in the latter definition is mine and, to my mind, makes it unequivocally clear that approved mileage payments are only exempt from income tax where paid to an employee in respect of business travel by him in his own vehicle.

In some ways, this is not unexpected. Under the 'old' company car rules, only business use of the car by the employee (to whom it was supplied) qualified in establishing whether the 2,500/18,000-mile break points were reached. Use by another person did not count. It is also clear from the commentary in the Revenue's leaflet IR124 (April 2002 edition), 'Using your own vehicle for work'. This refers to business journeys as those you have to make.

I must say that I find it rather surprising that the circumstances stated by 'Abbey' actually prevail. This must mean that a car owning employee has insured the car for business use by any individual and apparently seems happy that someone else should use his property. As a car owning employee myself, I am certainly not profligate enough to meet the insurance requirement. My car is insured for business use by me in person only. Do I detect close family relationships in the query?

Issue: 3872 / Categories:
back to top icon