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.