Having company cars has many upsides from attracting and retaining key talent to minimise vehicle risk. Unfortunately, this important benefit comes with Benefit-In-Kind Tax which employers need to manage appropriately. Now is a really good time to review how you record and report business mileage. Here’s why.
THE CHALLENGE - REAL-TIME REPORTING NOW REQUIRED
From January 1st 2019, Revenue Commissioners in Ireland have introduced major changes to the PAYE system. A key element of this modernisation programme is the need for employers to report PAYE in real-time. What this means in practice is that instead of a year-end reporting obligation, employers are now expected to submit a return each payday.
When it comes to company car BIK and business mileage reimbursement, Revenue advise employers that: "you will need to calculate the ‘cash equivalent’ of your employee’s private use of the company car. The cash equivalent is a percentage of the Original Market Value (OMV) of the car. The percentage is based on the amount of mileage for business purposes".
PwC, one of the leading accountancy firms in Ireland, recently wrote about the new real-time reporting obligation in relation to company cars:
"Company cars are typically provided for the full year, and the distances for determining the applicable tax rate are based on the number of miles/kilometres driven in the calendar year. Many employers struggle to get their employees to maintain and submit accurate logs on a regular basis, with the result that the employer may include the highest BIK amount (or an estimate based on the prior year’s mileage) and then perform a true-up semi-annually or at year-end. Particularly for employers who process weekly or fortnightly payrolls, it would involve significant additional business process to request, obtain and review all employee mileage logs on a weekly/fortnightly basis."
In a recent update, Revenue also noted that “you should review notional pay regularly (at least quarterly) to ensure the payments reported to Revenue are as accurate as possible”.
Accountancy firms with experience in this area, report that business mileage and BIK tax have consistently been among the top areas of interest when Revenue engage in what they refer to as “Timely Targeted Interventions”. With tapering relief on BIK tax for higher levels of business mileage, if anything, there can be a temptation for some individuals to claim more business kms than actually driven. Coupled with recently increased resources and the use a system called REAP, leading accountants anticipate that Revenue can target non-compliance risks earlier and more frequently.
Another consequence to note is that from 2019, there are also increased penalties for underpaid tax. For example, the fixed penalty of up to €4,000 per incorrect return, effectively means a potential penalty of €48,000 for any given year. This is in addition to statutory penalties which range from 3% to 100% of the tax due.
Finally, in cases where PAYE tax on mileage and travel expenses is not correctly withheld, the tax will be recouped by Revenue on a grossed-up basis, meaning that every €1,000 paid to employees will cost the employer €2,309 including tax and employer PRSI
COMPANY CAR BIK EXAMPLE
Sam is an account manager and drives a company car with an OMV of €25,000. Suppose in 2019, Sam claimed annual business mileage of 28,000 kms and payroll applied reduced BIK tax of 24%. on the €25,000 of €6,000 instead of €7,500. However, when Revenue undertook an audit, Sam could not produce sufficient evidence of this business mileage and so the following tax and penalties were applied:
Underpaid tax: €1,500
Fixed penalties: €4,000
Statutory penalty: €750
TOTAL CHARGE: €6,250
Note: this example is based on just one driver, for one quarter and for one band change. Clearly the tax and penalties can be higher if any of these three conditions are increased.
HOW TO BE TAX COMPLIANT TODAY
Undertaking a tax review will help identify potential gaps in your current processes, including any company car BIK tax and/or business mileage reimbursements for grey fleet drivers. You should speak with your tax advisor for guidance and/or see below for further guidance and contacts.
Ensure your BIK tax deductions follow Revenue rules, see Revenue’s BIK Ready-Reckoner for instance. Of course, Revenue are well aware that claimed business mileage logs submitted on Excel, may or may not reflect the reality of business trips undertaken i.e. whether trip distances are exaggerated or if the journeys occurred at all! As a consequence, Revenue audits invariably target company car BIK / business mileage expenses as an easy way to show a return on tax audits. As a result, this practice is likened to “shooting fish in a barrel” by more than a few tax experts!
Simple to use digital technology too can help you ensure tax compliance by providing evidence of actual business trips in the form of an electronic logbook. Reducing the hassle of mileage administration for staff who are on the road, also means that they will have more time to spend on more productive activities. A third benefit is that payroll professionals - already facing increased reporting - will not have to wait for or spend so much time chasing mileage and consolidating multiple Excel sheets.
CHOOSING A BUSINESS MILEAGE SYSTEM
While commercial vehicle telematics (commonly referred to as “trackers”) usually have some mileage-logging functionality, they tend to be too complex, expensive and/or viewed as “big brother” for the purpose. In contrast, smartphone app technology - such as DriverFocus Ally - can automate actual business mileage capture while being a simple and positive experience from a user perspective. Whatever system you choose - correctly implemented - should greatly help remove the “low-hanging fruit” of non-compliant mileage. And of course showing strong compliance around BIK and mileage may lessen the chances a more extensive Revenue intervention!
Revenue - Guide on Private Use of Company Cars
IPASS - Company Car BIK Guidance (pg. 12) and BIK Training for Payroll Professionals
Deloitte - article in Accountancy Ireland (January 2019)
KPMG - PAYE Modernisation and Real-Time Reporting
PwC - PAYE Modernisation: Are you ready for real-time reporting?