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