There are many good reasons why employers choose to offer staff company cars - from attracting and retaining key talent or to minimising vehicle risk. Unfortunately, this important benefit also comes with Benefit-In-Kind (“BIK”) Tax which employers need to manage appropriately. DriverFocus has researched current best-practice around tackling business mileage and discussed the issues with Ireland’s leading tax and payroll professionals. In this article, we share our findings and explain why now is a really good time to review how you record and report business mileage.
THE CHALLENGE - REAL-TIME REPORTING NOW REQUIRED
From January 1st 2019, the 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 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 more recent update, Revenue noted that:
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 kilometres than actually driven. Coupled with recently increased resources and REAP - Revenue’s compliance profiling system - it is anticipated non-compliance risks will be targeted 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
Undertake a tax review to 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 best-practice 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 a relatively easy way to show a return on tax audits. Consequently, this practice was likened to “shooting fish in a barrel” by more than a few tax experts!
Simple to use digital technology can also help you ensure tax compliance by providing evidence of actual - rather than claimed - 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 an increased reporting burden - will not have to wait for or spend so much time chasing mileage logs.
CHOOSING A BUSINESS MILEAGE SYSTEM
Today, most employees - over 80% according to an IPASS Survey in 2017 - use the likes of Excel to report business mileage. Of course, such claimed mileage can include fictitious trips or “rounding-up”. There is though, a better way to ensure that your business is not exposed to additional costs and tax penalties as outlined above.
“In our view, the only “watertight” method of ensuring that the company car BIK is calculated correctly is to track business mileage by keeping a log book or using a smartphone app”
- Claire Davey, Tax Director, KPMG Ireland
While commercial vehicle telematics (commonly referred to as “trackers”) typically have some trip distance reporting functionality, these systems tend to be too complex, expensive and/or are viewed as “big brother” by staff, for the purpose of simply logging Revenue-required, business trip data. In contrast, smartphone app technology - such as DriverFocus Ally - can automate actual business mileage capture while being a simple, positive and respectful experience from a user perspective. Whatever mileage capture system you implement should greatly help remove the “low-hanging fruit” the next time a Revenue Inspector comes calling. And of course showing strong compliance around BIK and mileage should lessen the chances of a more extensive Revenue intervention!
Deloitte - article in Accountancy Ireland (January 2019)
KPMG - PAYE Modernisation and Real-Time Reporting
PKF - PAYE Modernisation and Benefit in Kind
PwC - PAYE Modernisation: Are you ready for real-time reporting?