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Mileage reimbursements revisited – again!

Tax Alert - September 2019

By Andrea Scatchard

Readers will recall that about this time last year Inland Revenue finalised its statement on mileage reimbursements for employees, implementing the new two tier mileage rate methodology. This was covered in our August 2019 Tax Alert. To summarise the new two tier methodology, the Tier 1 rate includes an allowance for the fixed costs of the vehicle, and can be used for the first 3,500km of reimbursement to an employee (if no logbook records are maintained), or for the business portion of the first 14,000km of total travel by the employee (if a logbook is maintained). The relevant Tier 2 rate, which only covers the variable costs of running the vehicle, must be applied to all reimbursements beyond this in an income year.

Since the publication of the statement last year, advisers and employers have been struggling with the practicalities of the statement and its application. Further submissions to Inland Revenue officials have resulted in Operational Statement OS 19/04b being issued in August 2019. This statement provides a method acceptable to Inland Revenue of calculating tax free reimbursements, and attempts to provide employers with a more practical approach to calculating reimbursements to employees who travel significant levels of business miles in their personal vehicles.

Firstly, the statement confirms the new rates that apply from 30 May 2019. These have all been increased, albeit slightly, with the exception of the Tier 2 rate for electric vehicles which has remained the same. The full rates are reproduced below, and can be used now by employers.

Secondly, the perspective of the examples in the Operational Statement has been changed. These are now aimed at a reimbursement for a specific business trip undertaken by an employee, whereas before they were looking at reimbursements from an annual perspective. While this is useful in the context of understanding the tax on a specific reimbursement payment, it does not provide a solution to the heavy compliance costs that will be faced by any employers whose employees undertake large amounts of business travel in their own vehicles.

We would have liked to see Inland Revenue take a more practical approach and endorse a methodology by which employers could use log book data to extrapolate annual total mileage, allowing an annual blended tax free reimbursement rate to be calculated for the year for each affected employee.

In our view this would allow employers to apply a fixed tax free amount for all reimbursements made to an employee during an income year, so that complicated changes to the PAYE treatment of reimbursements, or to the level of per kilometre reimbursement payment made, are not required part way through the year. Inland Revenue’s concern is that this may allow the fixed costs (which are factored into the Tier 1 rates only) to be over-represented in the total reimbursement. Ultimately though, in our view provided the reimbursements made by employers are a reasonable estimate of the fixed and variable costs incurred by an employee then the reimbursement should be able to be made tax free. Operational Statement OS 19/04b is simply one acceptable method to calculate those costs, this does not mean that other methods cannot be used provided they can be demonstrated to be reasonable.

For more information about applying the new mileage rules or other options, please contact your usual Deloitte advisor.

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September 2019 Tax Alert contents

·         What's on the tax policy work programme

·         A stick and carrot approach: FATCA, CRS and QI update

·         Customs is also interested in your transfer pricing 

·         Taxing telecommunication tools

·         Mileage reimbursements revisited - again!

·         Follow the rules when deducting bad debts

·         Recent developments

·         Deloitte Insights app 

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