There is no doubt that travel and mileage expenses represent a significant cost center for most companies. Yet, many misconceptions still surround them. In this article, we clarify some of the myths related to mileage expenses and give a few guidelines to help you better deal with them.
Misconception 1. Keeping a close eye on mileage expenses is not necessary
Mileage is by far the most commonly claimed expense and this is growing rapidly as the workforce is becoming more mobile and distributed. It is also the most difficult to control because it is easy for employees to overestimate claims. Most abuses are the result of common habits such as rounding-up or guesstimating distances. The potential savings from eliminating excessive mileage payments is huge and can be as important as 20% of the total cost.
Misconception 2. Tracking VAT is not worth the effort
Combating fraud is not the only source of savings. Tracking and reclaiming VAT is another one. While it may seem complicated to implement, companies doing it properly actually improve their bottom line.
Reclaiming VAT tends to reduce the bill by 2.5 to 3 pence per mile. Assuming an average traveled distance per employee of 200 miles per month, a company with 100 employees would recover £7200 per year.
Misconception 3. All mileage allowances are tax-free
Not exactly! You can reimburse your employees according to the mileage rate you choose, however there are legal limits beyond which you need to pay taxes. The reason is that authorities don’t want you to use expense payments as supplement to employees’ salaries.
Mileage Allowance Payments (MAPs) are the payments your business makes to employees for using their own vehicles for business journeys. You are allowed not to report a certain amount to HMRC, the approved amount. Calculating those “approved amounts” is straightforward, just multiply your employee’s business travel miles for the year by the rate per mile for their vehicle.
Here are the rates per vehicle type:
|Type of vehicle||First 10,000 miles||Above 10,000 miles|
|Cars and vans||45p||25p|
So if, for instance, an employee travels 12,000 business miles in their car, the approved amount for the year would be £5000 or (10000 x 45p + 2000 x 25p). It really doesn’t matter if the employee uses more than one vehicle – it’s all calculated together.
If you make payments above the approved amount, you’ll have to add the excess to the employee’s pay, and then pay taxes as normal.
Here is an interesting bit, if the employee gives a ride to a colleague, you can pay the passenger up to 5p per mile tax-free. By increasing the incentive for car sharing, this payment could be a nice way to ultimately reduce mileage claims while saving the planet!
Misconception 4. Employee can claim journeys from home to office
Unfortunately, that’s not allowed. A journey from an employee’s home to the office doesn’t qualify as a business expense. However, an employee can claim mileage if he makes a trip to another office, which is not his normal work place.
Misconception 5. To claim VAT, we have to keep all original paper receipts
No! Businesses don’t have to retain paper receipts in order to claim VAT and to comply with the regulation in place. Digitizing receipts and then storing the pictures is as good as keeping the paper receipts if not better. Of course, you need to respect a few basic principles. The digital copy needs to be legible, clear, accessible, and printable.
Going digital has other benefits too. Receipts are less likely to be lost and the number of errors is likely to be reduced. In addition, your auditor will thank you because the auditing process will be considerably simplified.
Misconception 6. Reimbursing only the shortest route will reduce costs
Well, at face value this looks a sensible policy to combat fraud and encourage responsible behavior. However, you should ask employees to use the most effective route, not the shortest. For instance, driving around a city center may result in a higher claim than cutting through it. Nevertheless, at rush hours the gains in term of time largely outweigh any mileage expense savings. Asking your business travelers to systematically add a note to explain the reasons for taking a specific route is smarter and more likely to discourage abuses.
Misconception 7. Employees can use their own car without business insurance
Wrong and dangerous! Any employee who uses their car for the purposes of their work, outside of commuting from and to the office, needs to pay for business car insurance. This is different than a standard policy, which only covers private use.
Business insurance will cover anything an employee does on behalf of the company such as travelling between different work locations and visiting customers. Such insurance may be expensive but not having one can prove problematic in case of a serious accident.