Mileage rates should be reviewed – or scrapped altogether

According to management consultants Emmerson Hill Associates (who research motoring costs for the RAC) running a car nowadays is simply not a ‘profit-making’ activity, but no one seems to have alerted the Treasury to this. This is evidenced by the dogmatic approach to travel-related mileage payments adopted by the Treasury and HMRC (the taxman) which assumes that people paid more than their notional figure of 40p/mile make a ‘profit’ out of running their cars for business, and are therefore liable for tax on it. But the system does not appear to also recognise that drivers may suffer a loss. With the rapid escalation in fuel prices (up 2p/litre per week in many areas), that is exactly what is happening and many employees are being short-changed. They are taxed if they are paid more than the notional official rate of 40p/mile, yet where it costs drivers more, the message from this government is simple – “tough”.

It seems that the unwillingness of HMRC to index-link official mileage rates, coupled with the dogmatic belief that employees ‘make a profit’ out of running their cars is causing considerable discontent among employees. Many employees are now refusing to use their own cars on their employers’ business - because they are out of pocket.

Approved Mileage Allowance Payments (AMAPs) of 40p/mile were first introduced in 2002, when unleaded petrol was priced @ 77.9p/litre. Despite fuel now costing 50% more (116.9p/litre) they have not been changed, Worse still, six years on, there is no mechanism (like that adopted by the IRS in America) to index-link them. Assuming that one quarter (or 10p) of the original 40p represented fuel, this should be increased by 50% to 15p, and if properly indexed-linked to fuel prices, the 40p/mile should now be at least 45p/mile.

It gets worse. HMRC also set out so-called ‘advisory’ fuel rates for company car users, which are supposed to be reviewed when fuel prices increase by a margin of more than 5% - but HMRC haven’t been exactly quick off the mark to adjust these and are miles behind the curve in their reaction time. Employees buy their fuel today, not in three months time. As a result of such extreme delays and the Treasury burying their heads in the sand, pretending that motoring costs haven’t gone up, the official mileage and fuel rates set out by HMRC have lost all credibility and should be scrapped, says Bob Blackman, a management consultant with Emmerson Hill Associates.

“We recommend to clients that they side-step car mileage rates and pay a travel allowance which reflects what it actually costs to get about on business, after having researched what costs may be in their area. We have researched the costs of travel in a number of geographical areas, and find that in most places they exceed 50p/mile, with costs in some areas far higher than this. Where employees can practically go about their business using public transport, this is good for the environment and can ease congestion and parking problems” says Bob. “But not everyone can use public transport – it is often very costly, inconvenient, infrequent, and doesn’t go where people want to go. So the millions (such as key public sector workers) who have to go about on their employers’ business using their own means of travel – whatever that is – are disadvantaged by HMRC dogma”.

For business fuel in company cars, Emmerson Hill recommend that employers issue employees with fuel cards and pay only the actual costs involved in business travel, having identified the cost of private use and recovered this directly from employees. Bob Blackman added “People shouldn’t be taxed if the employer is paying only what it costs – whatever that may be”