Mileage reimbursement rates – what you need to know
Tax Alert - June 2021
By Andrea Scatchard
Inland Revenue has just released its vehicle kilometre rates for the 2021 income year, and it’s not good news, particularly for employers who will need to quickly update mileage reimbursement systems for the new rates. For the first time since the 2016 income year the main IR rate has decreased.
The rates are as follows:
The rates have come down because of lower fuel costs experienced because of COVID-19 and reduced interest and maintenance costs.
The IR kilometre rates are relevant in the following circumstances:
- Working out the amount of vehicle expenses a self-employed business person can claim;
- Working out the amount of vehicle expenses that can be claimed by a close company that meets certain criteria, in relation to vehicles provided to shareholder-employees; and
- Working out how much an employer can pay tax free to an employee to reimburse for work-related use of the employee’s personal vehicle.
Of course, self-employed people or employers are not required to use the IR kilometre rates, other methods are allowed, but the IR kilometre rates provide what is intended to be a simple, cost effective method of calculating these amounts.
As a reminder, the Tier 1 rates (which reflect the fixed and variable costs of running a vehicle) can be used for the first 3,500km of business travel, or the business portion of the first 14,000 of total travel in the vehicle. After these limits, the lower Tier 2 rates (which only reflect variable costs) apply.
We have written several articles in the past on the practical problems with the two-tier kilometre rate method in particular for reimbursing employees and suffice to say these still exist where employees are reimbursed for high levels of work related travel. If you’d like to refresh your memory on this method, we wrote about the practical issues with introduction of the two-tier system in August 2018, and updated it with new developments in September 2019.
What does this change mean for you?
Self-employed and close companies
If you are a sole trader or qualifying close company and use the kilometre rate method to claim business vehicle costs, this new rate applies for the 2021 year – the year ended 31 March 2021 if you have a standard balance date. The decrease in the rate will reduce the amount of vehicle costs you can claim when you file your 2021 tax return. If you have already filed your 2021 income tax return, and relied on the 2020 kilometre rates, then strictly speaking the amount of deductible vehicle expenses must be recalculated. Depending on the amount of the difference between the two amounts you will either need to request an amendment to your 2021 income tax return, or you may be able to self-correct the difference in your 2022 income return.
If you are an employer and are reimbursing employees for work related travel, the reduced rates apply to reimbursements made from the date that they were issued – 27 May 2021 - and you need to review your reimbursement policy. When the rates have increased in the past a lag in updating rates paid to employees, while potentially disadvantageous to employees, did not cause a PAYE problem. However, a decrease in the rates does require immediate attention.
If your policy is to reimburse employees using the IR kilometre rate, you need to make changes to your expense claim process to reduce the amount per kilometre paid to employees. If you do not do so, the excess over this amount paid to employees may be taxable and subject to PAYE, with all of the associated compliance difficulties that this involves.
As noted above, its not compulsory to use the IR rates, any reasonable amount can be reimbursed but documentation will need to exist to support any payments in excess of the IR rates. If you have separately negotiated reimbursement rates with employees, you need to review these to determine whether the amount paid to employees could now be in excess of the updated kilometre rates allowed by IR.
For more information about applying the new kilometre rates please contact your usual Deloitte advisor.
June 2021 Tax Alert contents
- New business continuity test – Inland Revenue releases guidance
- Intra-group service charges – are your group’s processes up to date?
- The wage subsidy debate continues… over a year on, was the scheme a success? And are you safe from audit?
- Advantage sports: being a team player can reduce your tax bill
- Are your records up to standard?
- Mileage reimbursement rates – what you need to know
- Snapshot of recent developments