Commercial Issues Commercial Issues

There are no hard and fast rules about how to compute the best financial solution for any group of employees except to say that the comparisons must be balanced.

Where the employee is essentially replacing a company car with a new car under a cash allowance or ECOS arrangement, the total whole-life cost of the fleet car, including all the fuel and insurance the company pays for, together with the Class 1a NIC and other costs must be gathered for the company car, while the total mileage payments and any cash allowance (at the gross/ untaxed level) paid by the company must be calculated for the employee's own car.

In cases where business use is modest, irregular and infrequent, the comparison would be made against the costs of supplying a rental car for each individual journey - or perhaps using public transport where this is available. In some urban situations, it might even be that using a taxi could be more flexible and less expensive!

To make an effective assessment, the employer needs to have a clear picture of the overall mileage patterns. Ideally this should be down to individual employee level - for employees' own cars at least, this data must exist somewhere in the system otherwise there can be no justification for any reimbursements made on a mileage basis.

For many years, Inland Revenue/ HMRC has provided an easy option to minimise the issue of fair recompense for mileage payments. The system is based on a broad averaging basis to produce a simple schedule of "Authorised Mileage Allowance Payments" (AMAPs). The schedule which has been in place since 2002 has only 3 elements: a higher and a lower mileage rate, with a mileage threshold for the rate change.

These are shown in Table 1:

Table 1 - HMRC AMAPs schedule

  • Mileage threshold 10,000 business miles pa
  • For business mileage up to threshold 40 p/ml
  • For business mileage over threshold 25 p/ml

These rates apply to all cars, irrespective of fuel type, engine size or age.

These rates represent the values that HMRC consider "non-profit yielding" to the employee. The actual rates paid by an employer can be anything agreed between the parties, but any rate paid over the annual amount calculated under AMAPs is taxable on the employee: conversely if the rate paid is less, the employee can claim tax relief on the shortfall.

It is widely accepted that these rates are probably inadequate to recompense an employee in a newer, larger, thirstier car; but are more than adequate for an older, smaller more fuel-efficient model. So far (to Q3 2008) HMRC have been happy to maintain a simple system with little requirement for employer resource to manage.

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