Vehicle tax and mileage
Expenses are tricky, to say the least, but vehicles are where things get really complicated. You'd be wise to take the advice of an accountant on what the most cost-effective way to provide yourself and any employees with business vehicles or mileage is.
This guide can give you a basic understanding of the complexities and rules involved in using vehicles for business purposes, both for yourself if you are a self-employed person, and for employees (if you're a director of a limited company you're treated as an employee for tax purposes).
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Employees using company cars
The key thing to point out is that if an employee uses the car for personal use (which includes commuting to and from the office), it complicates things since the company car becomes a benefit in kind.
If you let an employee earning more than £8,500 a year (including the value of the benefits) use a company car for both business and personal use, you are providing them with a benefit in kind.
You need to charge Class 1 NICs on the value of the car at the end of the tax year (use the company car and fuel benefit calculator on the Employer CD-Rom in your Employer Starter Pack or on the HMRC site). You also need to report it to HMRC using the P11D.
You also need to report and pay Class 1 NICs on any fuel used for personal use in the vehicle, unless the employee pays you back in full for personal fuel by the end of the tax year. You can calculate how much you owe to HMRC for providing the car and fuel as a benefit using HMRC's tool.
You need to record the value of cars and fuel in section F of the P11D. You don't have to report or pay NICs on fuel used for business purposes. That means it's much easier for you if you get your employee to just pay you back for any fuel they've used for personal use - then you don't have to report or pay HMRC anything for it.
But you don't need to record or pay anything if:
- The company car is used exclusively for business purposes and you ban any personal use (including commuting to and from work).
- The car is used for a carpool (by more than one employee) and used only for business purposes and personal business cross-over usage such as taking the car home to be able to attend an early meeting the next day (but not for normal commuting).
- The car has been adapted for an employee with a disability and is used only for business purposes and ordinary commuting.
- The employee is earning less than £8,500 (including the value of the benefits) a year.
HMRC classes a 'goods vehicle' with a max loaded weight of 3,500 kg as a company van.
If it's used for any personal use, you need to report fuel used for personal use and the van itself as a benefit and pay Class 1 NICs, as you would with a company car. But in the case of vans, ordinary commuting is allowed so doesn't count as personal use. In other words, you only have to report and pay if the van is used for more personal use than just commuting or popping into a shop on the way to work. You can use this HMRC tool to work out how much you owe HMRC for providing the van and any fuel as a benefit. Record the value of cars and fuel in section G of the P11D.
- You don't have to report the van as a benefit or pay NICs if it's used exclusively for business purposes.
- If it's used as part of a pool, the same goes as for a company car, above.
When an employee uses their own vehicle
Tax on mileage and fuel:
If an employee is using their own car or van, you get a certain tax-free allowance on the amount spent on fuel, know as approved mileage allowance payment (AMAP).
This is calculated by multiplying the number of miles travelled for business (not including normal commuting) by the relevant rate below (from the 2011/12 tax year onwards):
- Cars and vans that travel up to 10,000 miles in the tax year: 45p
- Cars and vans that travel more than 10,000 miles in the tax year: 25p
- Motorbikes: 24p (regardless of distance travelled)
- Bicycles: 20p (regardless of distance travelled)
The example: If an employee travels 16,000 miles in the tax year, the AMAP would be 10,000 x 45p + 6,000 x 25p = £6,000.
- The employee pays tax on any excess over the AMAP (so in this example, if the employee had spent £8,500 on fuel, they'd need to pay tax on £8,500 - £6,000 = £2,500).
- You record any excess amount in the P11D (so in this example, you'd record £2,500).
- If the total mileage allowance payment is less than the AMAP (the £6,000 in this example), you don't need to record or pay anything.
NICs on mileage and fuel:
HMRC take into account any payments you make to an employee relating to anything to do with the car, for personal or business use, on top of the mileage and fuel used (unlike with tax). You calculate the AMAP in the same way as above, but HMRC call it the qualifying amount (QA) when referring to NI calculation, and the rates are different:
- Cars and vans: 45p for first 10,000 miles and 25p per mile thereafter
- Motorcycles: 24p
- Bicycles: 20p
Any excess over the QA gets added to the P11D at the end of the year as above, and Class 1 NICs are paid along with other benefits in kind NI is owed on at the end of the year. If an employee takes another employee with them in the car on a business trip, you can pay them up to 5p per business mile. You don't need to report that figure to HMRC or pay anything on it.
Using your own car as a self-employed person
You can estimate the percentage of mileage you used for business purposes in a tax year, then claim back that percentage of car costs such as insurance, repairs and petrol as a business expense on your end of year tax return. Or you may qualify for using the AMAP system - talk to HMRC about this and work out if it would work out as more cost-effective for you.