Clause 57 - Mileage allowances: exemptions and relief
Finance Bill
10:30 am

Mr James Clappison (Hertsmere, Conservative)

We cannot allow the subject of mileage allowances to pass without making a few comments about it. The clause concerns payments made by employers to employees for business travel undertaken by employees in their own cars. Members of the Committee are familiar with various issues involving vehicle taxation and company car taxation. We must have it firmly in mind that those business journeys are made by employees, in their own cars, on behalf of the employer, and the employer remunerates the employee.

The matter was dealt with by the fixed profit car scheme, which was introduced in 1990 and gave a tax-free mileage based on engine size and the number of business miles travelled. The general principle is that remuneration made available by the employer to the employee for the employee's use of his or her own car is a benefit in kind and subject to taxation. The fixed profit car scheme, however, gave an exemption from taxation.

Clause 57 and succeeding clauses introduce a new statutory tax exemption for mileage allowance payments up to an approved rate paid by employers to employees for business. In contrast to the four rates under the former system, two rates are payable. For the first 10,000 miles of business travel, 40p a mile is payable. Each additional mile is assessed at 25p.

The Committee should also bear in mind the fact that the new exemption for a mileage allowance also exempts payments to employees for carrying other employees, whom the Bill describes as ``qualifying passengers''. Employees who carry fellow employees in the course of business travel in their own cars are given a qualifying passenger allowance for the grand sum of 5p a mile. The Government's intention is stated in the explanatory notes to the Bill.

What representations have the Government received about clause 57 and national insurance? That issue is of interest in some business quarters. There is particular interest in the administrative issues that arise when an employee is paid more than the allowed rate. There is a difference between income tax and national insurance contributions for these purposes. Given that income tax applies for a year at a time, it is administratively possible to look back over a year and mark the point at which 10,000 miles—the significance of which I have discussed—was exceeded and the lower rate began to apply.

National insurance, however, applies month by month during the year, which means that continuous monitoring of mileage is needed to see which limit applies. Under the arrangements for the fixed profit car scheme, the Revenue dealt with that by charging national insurance only on mileage payments that exceeded the higher rate. I am sure that those who are interested in the subject would like to hear a few words about the Government's thinking on national insurance and the new scheme.

More generally, it is worth bearing in mind the fact that the changes involve a considerable number of employees. Some 3 million people use their own vehicles for business travel on their employers' behalf, of whom 2.3 million receive some payment from their employers for that business mileage. Interestingly, the vast majority of those employees—almost 80 per cent.—drive less than 4,000 miles a year in the course of business travel, and only 5 per cent. drive more than 12,000 miles.

Employees with smaller vehicles receive a higher rate of mileage allowance under the new arrangements than under the fixed profit car scheme. Indeed, that has been the case since the beginning of this financial year. However, employees with vehicles in the two upper bands of the fixed profit scheme will see a reduction in their mileage allowance from April 2002. Drivers of vehicles above 2000 cc will lose 23p a mile over the first 4,000 miles.

Drivers of 1500 cc cars are entitled to feel a little perplexed about the provisions and where they fit into the Government's general view on the environment. Committee members will recall our debate about vehicle excise duty. Under clause 8, 1500 cc cars will become environmentally friendly, in the Government's view, because they are given a reduced rate of VED.

Members of the Committee will recall our debate about the difference between 1500 cc vehicles and 1549 cc vehicles, and what was magic about 1549 cc. We can take it as a Government statement that, under clause 8, 1500 cc vehicles are environmentally friendly. However, by clause 57 they have become environmentally unfriendly, because their tax-free mileage allowance is being cut for the first 4,000 miles. I am sure that drivers of those vehicles would be interested to hear from the Minister how they fit into the scheme of things. In any event, taking those provisions in the round, according to the Government's environmental impact assessment, the net effect on CO2 emissions is likely to be modest.

One other point worth bearing in mind is that in future not all employers will have the opportunity to disregard the authorised mileage allowance and have such emoluments and expenses dealt with in the same way as other emoluments and expenses. It should also be remembered that the fixed profit car scheme was voluntary. It was up to employees whether they took advantage of the provisions. This is a statutory provision, and under later clauses drivers will lose the opportunity to take advantage of capital allowance provisions, as well as the chance to make a claim for relief based on receipted bills or interest on loans related to car purchase.

Mr Graham Allen (Government Whip (technically Vice Chamberlain, HM Household); Nottingham North, Labour)

What do the Liberals think about it?

Mr James Clappison (Hertsmere, Conservative)

Apparently they are not very interested in this subject. The 3 million drivers affected are of no concern to them.

What does the Minister think will be the effect of the loss of capital allowances and relief for interest on loans, and how much will be lost by drivers as a result? How much benefit has the provision been to drivers in the past? It will be a significant deprivation for drivers not to have the opportunity to claim for capital allowances and seek relief for interest paid on the cost of the car.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

I begin by bidding you a warm welcome to the Chair, Mr. O'Hara. We are delighted that you are responsible for overseeing our deliberations.

Clause 57 and schedule 12 introduce further measures to discourage the driving of excess business miles and encourage the use of smaller and more fuel-efficient cars. Last year we introduced, and had much debate about, a new system of company car taxation to provide an incentive for company car drivers and their employers to choose more fuel-efficient cars. Members who were present for that debate will recall that we believe that significant environmental benefits, of the order of 1million tonnes of CO2 emissions a year by 2010, will result from the new system of company car taxation. Today we are explaining the equivalent incentive that we are introducing for employees who use their own cars for business journeys.

The hon. Member for Hertsmere (Mr. Clappison) said that the Government believed that the environmental impact of these measures would be modest. That is right, but the important point to which I draw the Committee's attention is that they are designed to ensure comparability with the changes that we made to company car taxation last year. We do not want to change significantly the incentives or disincentives affecting whether employees drive their own cars or company cars. We want to leave that choice more or less where it was, and, having made the changes last year to company car taxation, we now need to make changes to the arrangements for people who drive their own cars during their employment.

These changes are therefore an integral part of our overall strategy to improve the protection of the environment by reducing greenhouse gas emissions and improving local air quality. From April 2002, there will be a single approved rate per mile that employers can pay to employees who use their own cars for business, without creating a liability for tax or national insurance contributions. It is called the approved mileage allowance payment rate. As long as employers pay no more than the approved rate, they will not have to report to the Revenue. The new system will be significantly easier for employers to administer, because the same rate will apply to all cars, and significantly reduce the reporting requirements and the complexity of the system that employers have to manage. Employers will continue to pay the business mileage rate that they wish, but any amount above the approved rate will have to be reported and will be liable to both tax and national insurance.

The hon. Gentleman asked how such payments would be handled for national insurance purposes, given the difference between income tax and national insurance. We intend to align the amounts liable to tax and national insurance as far as proves practicable. Officials will consult employers' representatives soon to achieve the least regulatory method of implementing the change, which will be made via regulations later this year. The draft regulations will also be subject to consultation, which should reassure the hon. Gentleman that we recognise that important decisions must be made. We have not finalised the details yet, but we will do so once we have consulted those who will be affected.

Where the employer pays less than the approved rate, employees will be able to claim tax relief up to the approved mileage allowance payments, but they will not be able to make additional claims based on actual expenditure, or for capital allowances or interest on loans relating to car purchase. That will be a significant change in the way in which mileage payments are dealt with in the tax system; we will have a statutory arrangement based on the sums in schedule 12, instead of the several different arrangements that used to be available. As the hon. Gentleman said, the approved rate will be 40p for the first 10,000 business miles driven in a tax year, which is more than twice the 4,000 miles to which the current higher authorised mileage rate applies. As he rightly mentioned, many people who drive their own cars for business drive less than 4,000 miles per year.

Mr James Clappison (Hertsmere, Conservative)

Before the Minister moves away from the point about different systems, and the capital allowances and reliefs that were available, I note that he has taken on board the fact that employees could decide whether they wanted to be dealt with under that system or to take advantage of other provisions. Can he tell us how many employees sought to claim capital allowances on their vehicles or relief for interest on loans? If he cannot, I would be grateful if he would write to me, but it would be interesting for the debate if he had the figures at his fingertips.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

Unfortunately, I do not have the figures. I have asked the same question, and I believe that the information is not available because what the claimed capital allowances apply to is not always clear from self-assessment forms. If on further inquiry the information turns out to be available, I will ensure that the hon. Gentleman is provided with it.

The change will be a significant benefit to those driving between 4,000 and 10,000 business miles a year in small and economical cars, and to the many employees who drive up to 10,000 business miles in medium-sized cars. For any further business miles, the approved rate will be 25p per mile.

The hon. Member for Hertsmere rightly drew attention to the fact that as a further encouragement, to make business travel greener still, from next April employers will be able to choose to pay employees up to 5p a mile free of tax and national insurance for every fellow employee whom they carry on a business journey. Originally, in the pre-Budget report in November, we proposed a sum of 2p per mile. As a result of discussions with both business organisations and organisations such as Transport 2000, we decided that it would be better to increase that sum to 5p a mile, to provide a slightly greater incentive to employees to take fellow employees with them, and so drive in an environmentally friendly manner. We want people travelling on business to share their vehicles whenever they can, so as to reduce further the amount of unnecessary business miles travelled. I am a little disappointed that the Opposition amendments on the subject were not moved, so we have not been able to debate them. I think that those amendments reflected their welcome for the payments, which represent an important change for the better.

There will also be a tax-free accrued rate for business travel using motor cycles and bicycles. The rate for bicycles will be increased to a generous 20p a mile, to encourage their use whenever feasible. We are committed to protecting the environment for everybody. About 225 billion miles are travelled by car in the United Kingdom each year, and about one sixth of that distance is business travel, so it provides a significant proportion of the total mileage driven. Making those miles greener will substantially benefit the environment. We started the process with our reform of company cars. The measures in the clause, and those to follow, complete the picture. I commend the change to the Committee.

The hon. Member for Hertsmere is right: the change will increase the incentives for people who use their own cars for business purposes to drive more environmentally friendly vehicles. He made a point about the treatment of 1500 cc cars, although strictly speaking, the point applies to cars with engines of 1501 cc to 1549 cc—in other words, the extra ones that we added in on Thursday. It is a fair point, but it applies only to a small number of cars at the margin. However, our aim is not to castigate anybody driving any particular kind of car, or to suggest that they should not do so. We are simply ensuring that the tax system provides incentives for people to manage their affairs in an environmentally friendly way. I hope I have demonstrated that the Bill's provisions will have that effect.

I point out to the hon. Gentleman that, according to the AA, the total running cost for petrol cars with engine sizes between 1401 cc and 2000 cc is 18.42p per mile. That is not the total cost—it does not include the cost of owning the vehicle—but the total running cost, which is significantly less than the sum in the schedule. So I hope that the hon. Gentleman will feel that what is proposed in the clause is by no means unfair to people driving such cars.

Mr James Clappison (Hertsmere, Conservative)

I shall make two points to qualify what the Financial Secretary said. However, first of all, may I remedy my omission earlier in failing to welcome you to the Chair, Mr. O'Hara? I have quite rightly been pulled up on that by the Government Whip, in his usual charming way, and I hope that I can remedy the defect by giving you a warm welcome to the Chair now.

Two matters arise from the Minister's remarks: first, he described the incentive that the proposal creates for employees to downsize their vehicles. That should be put within the context of the Government's analysis in the environmental regulatory impact assessment, which, having taken into account the effects of the proposal and other changes, concludes:

``There is therefore a limited incentive to downsize''.

Secondly, the Minister mentioned the number of 1600 cc cars in use. On the basis of Library statistics, it appears that, considering the distribution of private cars used for business by annual business mileage, the vehicles that do the most mileage are those between 1500 cc and 2000 cc. Many vehicles within that category are between 1500 cc and 1549 cc, so the Government's environmental analysis, despite the Minister's cogent explanation, is a mystery.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

The hon. Gentleman is right that the bulk of the vehicles that we are discussing are between 1501 cc and 2000 cc. I do not agree with him that the Government are giving a conflicting signal in that respect, but even if we were, only cars between 1501 cc and 1549 cc, a small proportion of the total, would be affected.

Question put and agreed to.

Clause 57 ordered to stand part of the Bill.