Introduction 1-2. Key point summary 3-4. Comments Answers to questions 16-20

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1 APPROVED MILEAGE ALLOWANCE PAYMENTS Memorandum submitted in July 2007 by the Tax Faculty of the Institute of Chartered Accountants in England and Wales in response to an invitation to comment published in May 2007 by HMRC Contents Paragraph Introduction 1-2 Key point summary 3-4 Comments 4-15 Answers to questions Annex A - Who we are Annex B - The Tax Faculty s Ten Tenets for a Better Tax System ICAEW Tax Faculty, Chartered Accountants Hall, PO Box 433, Moorgate Place, London EC2P 2BJ T +44 (0) F +44 (0) E tdtf@icaew.com 1 of 6

2 APPROVED MILEAGE ALLOWANCE PAYMENTS INTRODUCTION 1. We welcome the opportunity to comment on the proposals published by HMRC on 11 May 2007 at 2. Details about the Institute of Chartered Accountants in England and Wales and the Tax Faculty are set out in Annex A. Our Ten Tenets for a Better Tax System which we use as a benchmark are summarised in Annex B. KEY POINT SUMMARY 3. We believe that the current system is simple, straightforward and is well understood by employers and employees. Given this, there needs to be be a compelling case for change and we do not think that the proposals in the consultation document present a compelling case. It seems to us that the proposed changes: will introduce complexity into something that is currently simple, and thereby increase both administration costs and the likelihood of mistakes; will further weaken the direct link between the costs incurred by employees and the tax-free reimbursement, which the current system achieves albeit in a fairly rudimentary fashion; and are unlikely to encourage employees to use cost- or CO 2 -efficient cars or alternative transport any more than the current system and rates. 4. We therefore think that AMAP should be retained in its current form. However, the rates should be reassessed based on up-to-date cost data. COMMENTS Different rates for different emission ratings 5. The principle behind the AMAP is to reduce compliance costs, for both employers paying allowances to employees for using their own vehicles for business purposes, and HMRC in monitoring compliance with the payment of allowances. The current system was simplified several years ago to remove rate differences between bigger and smaller cars. The present arrangements work very well and are easy to understand for employers, employees and HMRC staff. 6. The current AMAP rate structure, under which there is one set of rates for all cars, means employees using more fuel-efficient vehicles are rewarded (ie, are marginally better off) because the allowance arguably more than covers the costs of the business mileage incurred. Employees choosing to use less efficient vehicles still receive an allowance towards the business use of their vehicle but are effectively being asked to make a greater contribution to the cost of their additional carbon footprint. 2 of 6

3 7. Introducing a range of allowances for different types of cars, together with the possibility of additional variations depending on miles travelled, seems to be a retrograde step. 8. The proposals will work against the objective of the scheme, which was to reimburse employees in a simple and straightforward way for cost incurred in using their car for business travel. The proposals will increase complexity and will result in increased compliance costs, whilst it is far from clear that the proposed scale rates will encourage employees to choose more fuel-efficient cars than they do under the current rules. Administration 9. Currently it is not necessary to know the emissions of the employee's car to complete and process the expense claim, ie it is quick and simple, and because everyone knows the current rates, mistakes are rare. 10. Having to rely on employees to detail what the emission rating is on their cars, and the likelihood of their getting it wrong, will lead to an increase in compliance costs. Employers will need to check that the amount claimed is at the correct rate for the car actually used. Mistakes are likely to arise and the compliance costs are likely to be considerable. 11. The current 10,000 mileage threshold is sufficiently high for most employees detailed mileage records to be largely unnecessary. If the threshold is reduced to, say, 5,000 miles, many more employees than currently are likely to be subject to the lower mileage rate. The need to accumulate the mileage records for each employee much more precisely than hitherto will increase the administrative burden. 12. Many families own two cars and employees use either car while driving on their employer s business. The expenses claims are likely to be complex and mistakes will be much more likely. In practice HMRC are likely to find that such a scheme will be difficult to monitor and it could be much more prone to abuse. Rates and thresholds 13. The initial allowance of 40p per business mile was set based on the (then) current calculations of an average vehicle used for an average mileage. There was some concern by users of larger cars at the time, mainly because the allowances had previously ranged up to 63p per business mile. On the whole, however, we believe that 40p per mile was acceptable for most people. 14. Following on from the above, it should be possible to calculate what the initial allowance should be now to reflect the average position. If, for example, the costs have reduced (in fact, our members believe that costs have risen), then the initial allowance could be proportionately reduced. If, however, the figures are skewed due to higher initial on the road costs (for example insurance, road fund licence, MOT, etc), then the initial allowance could remain at 40p but the secondary allowance (currently 25p per business mile above 10,000 miles) could be amended. As noted in paragraph 11 above, reducing the mileage threshold from the current 10,000 miles will increase compliance costs. Another alternative would be to keep the mileage threshold but lower the 25p reimbursement rate. 3 of 6

4 15. Depending on the calculations, there could be a number of different scenarios, of which one would be chosen for its neutrality, as was done for the existing rates. ANSWERS TO QUESTIONS 16. The HMRC consultation paper states that HMRC are looking at three particular areas. We comments on these areas are as follows. Whether the rates and threshold can be adjusted to better reflect differing costs of drivers using their own cars for business. 17. As noted above, AMAP rates need to be amended better to reflect current motoring costs. If they are to reflect current costs, they should probably be increased. Fuel is much more expensive now than it was when the AMAP rates were set, and other expenses such as the capital cost of cars have also increased in the intervening years. Whether the structure can be changed to encourage drivers to be more environmentally aware 18. As noted above, the current structure of AMAPs does favour to a reasonable extent employees who use more fuel-efficient cars for business purposes as compared to those who use less fuel-efficient cars. However, it seems unlikely that a change of a few pence in tax-free mileage reimbursement (which means in practice a change of up to 40% of a few pence for the drivers of large cars with a high capital cost) will lead to a major shift in behavioural changes. 19. If the structure refers to the bigger picture, then quoted CO2 emissions are but one part of the wider environmental effects caused by cars. For example, government may need to consider as a policy measure further improvements in public transport in order to encourage less driving. This is likely to be a long-term policy decision but if this were done, it might then be reasonable to amend the AMAPs so that employees are discouraged from travelling long distances. However, such a policy decision would need to balance a number of factors, is likely to be unpopular and may not result in the behavioural changes expected, Whether the tax and NICs rules can be aligned for mileage payments 20. HMRC s paper does not address this. Given that there are many structural issues that make alignment of tax and NICs unlikely in the short-term, the current NIC arrangements appear to remain the most practical solution. PCB of 6

5 ANNEX A WHO WE ARE 1. The Institute of Chartered Accountants in England & Wales is a professional body representing some 128,000 members. The Institute operates under a Royal Charter with an obligation to act in the public interest. It is regulated by the Department of Trade and Industry through the Accountancy Foundation. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy (which includes taxation). 2. The Tax Faculty is the centre for excellence and an authoritative voice for the Institute on taxation matters. It is responsible for tax representations on behalf of the Institute as a whole and it also provides services to more than 11,000 Faculty members who pay an additional subscription. 3. Further information is available on the ICAEW Tax Faculty website at or telephone of 6

6 ANNEX B THE TAX FACULTY S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1. Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament. 2. Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. 3. Simple: the tax rules should aim to be simple, understandable and clear in their objectives. 4. Easy to collect and to calculate: a person s tax liability should be easy to calculate and straightforward and cheap to collect. 5. Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes. 6. Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear. 7. Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it. 8. Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed. 9. Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions. 10. Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK. These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99; see 6 of 6