Businesses are paying fines and penalties totalling hundreds of thousands of pounds to HM Revenue and Customs (HMRC) after investigations revealed inadequate business and private mileage record-keeping.
The issue is in the top 10 risk areas of employment tax compliance management, according to tax advisers Grant Thornton.
Mileage capture experts Fleet Innovations has undertaken 72 mileage data audits to date on behalf of clients and told Fleet News that not one company was 100% compliant with HMRC rules.
“There are varying degrees of non-compliance,” said managing director Alex Baker.
“Some organisations are missing just one part of the process and that can be quickly rectified, but for others their mileage record-keeping is staggeringly inept.
“Employees are either making fraudulent claims that managers are signing off or records are incomplete, making an independent audit impossible.”
HMRC launched a new approach to ‘business record checks’, specifically targeting small and medium-sized enterprises (SMEs), in late 2012.
It has been investigating the affairs of thousands of organisations and tax experts have described incomplete mileage records as a ‘low hanging target’ due to them frequently being inadequate.
Record from current and previous tax year analysed
Inspectors will typically analyse records for the current and previous tax year and will treat that as being representative of what has happened previously.
For example, if it was discovered two out of 10 drivers had made errant claims, HMRC would work on the basis that 20% of all payments were incorrect and apply penalties accordingly.
Businesses could appeal, but would have to demonstrate that all other drivers’ claims were compliant.
Tax inspectors are uncovering poor mileage record-keeping in a number of areas. They include employees overestimating business mileage by an average of 25% with their employer having no auditable evidence – postcode to postcode or to and from an actual address – of a journey taking place, and ‘positive rounding’ with employees inflating business mileage so recorded trips usually end in ‘0’ or a ‘5’.
Inadequate or non-existent records relating to an auditable split of business and private mileage, where employees reimburse their employer for fuel used privately or claim business mileage, are also being investigated.
Frequently there is no evidence of any private journeys undertaken, including a daily home-to-office commute or weekend trips.
In addition, poor private journey record-keeping often sees no auditable evidence of a journey taking place.
HMRC assumes an average 6,000 private miles a year – suspicion is aroused if employees claim less, so accurate records must be available.
HMRC has also discovered examples of employees claiming business mileage at their employer’s grey fleet rate following the introduction of a salary sacrifice car scheme, rather than switching to the lower company car Advisory Fuel Rate.
Paul Jackson, managing director of The Miles Consultancy (TMC), said: “If a business suspects its mileage records are not up to scratch, they should do something about the process. Then, if HMRC do visit for an audit, they will be comfortable with what they see.
“If a business has been pulled up, it’s likely they will be checked three or four years later. That’s generally how long it takes for employees to start misbehaving again unless the company keeps a good grip on its processes.”
HMRC can levy a fine on a business of up to £3,000 per annum per employee for an incorrect tax return.
Inspectors can also determine whether the inaccuracy was careless, deliberate but not concealed, or deliberate and concealed, and will link a penalty for each offence as a percentage of ‘potential lost revenue’ – up to 30%, up to 70% and up to 100% respectively.
That could involve unpaid tax going back four years, unpaid National Insurance going back six years, lost interest on those sums as well as a late payment penalty and if negligence is proven then penalties could apply over a 20-year period.
Can companies demonstrate good business rationale?
Sharon Gilkes, associate director and head of the London employment tax team at Grant Thornton, said: “The company car fuel benefit scale charge is an all-or-nothing charge, so if only one mile has been clocked up privately it can trigger a charge and that can quickly mount into penalties of many thousands of pounds with back tax and Class 1A NIC and interest on non-payment.”
However, she said if organisations could justify that there was “good business rationale” behind a policy it had adopted, then HMRC would accept the process.
Gilkes highlighted one case in which a company was facing a £20,000 HMRC penalty relating to the non-declaration of private mileage by its sales director.
However, she explained: “We analysed the role of the individual and could prove that the director had a number of places of work so did not have a regular commute.
“The rationale was accepted by HMRC and the company escaped the fine. Employment work patterns have changed and it is not unusual for individuals to work out of a number of locations, but records must be kept.”
Jackson said: “We worked with a fleet facing a seven-figure claim from HMRC over its business mileage payments.
“We helped them put together a case that said ‘we didn’t realise we had a problem but we now understand what we were doing wrong. This is that we’re going to do to stop this happening in future’.”
Remedial action resulted in lower penalty
“The business didn’t try to offer excuses – it explained how it intended to rectify the situation,” added Jackson.
“The way it responded resulted in a lower penalty, although the company eventually paid HMRC at least £200,000.”
Nigel Morris, who was an HMRC auditor for 12 years and is now a senior manager at business advisers PricewaterhouseCoopers and co-founder of Fleet Innovations, said: “When a business is exposed, it will more often than not co-operate and settle the liability due on a grossed up basis.
“Fuel may cost businesses a few hundred pounds per employee per annum, but the errors can cost organisations thousands of pounds simply because they do not have policies and procedures in place that provide HMRC with adequate information.
“An HMRC investigation is a major business headache and diverts company resources to answer questions and interpret records so the administration burden should not be under-estimated.”
Jackson said: “Fleets need to keep good records, and provide drivers with good logging and expenses tools. The most crucial thing is to show that claims are regularly scrutinised and any errors are cleared up.”
An HMRC spokesman said there was no specific crackdown on mileage record-keeping, but inspections were part of its normal work in terms of checking employer records that did not focus on tax-specific matters.
Levels of fines in relation to poor mileage records
• A south of England-based pharmaceutical company initially fined £10 million for mileage record discrepancies associated with around 1,000 drivers. The company appealed and eventually agreed a settlement of about £1 million.
• A company fined £500,000 after an HMRC inspection of mileage claims relating to 20 company cars was extrapolated across the organisation’s 300-strong fleet.
• An SME with 15 drivers fined £25,000 after an HMRC audit revealed an employee - one of three whose mileage reimbursement claims were closely scrutinised - had significantly overstated their business mileage. The business paid tax liabilities and penalties in relation to one third of all mileage claims, going back four years.
• A construction company in the West Midlands fined £128,000 for discrepancies in relation to 10 vehicles.
• A transport company fined £42,000 for irregularities relating to 10 vehicles.
• A business fined more than £28,000 in relation to mileage errors associated with two company cars.
• A company fined £21,875 also relating to inadequate mileage reporting relating to two company cars.