By RAM Tracking on 30 Aug 2017
Personal use or “out of office” mileage occurs when an employee uses a company vehicle for private purposes, meaning transportation that is not related to authorised business of the organisation.
There are various methods to charge the employee that is making out-of-office mileage and depends on whether the value of personal use is imputed as income or not. If this is the case, the fleet operator doesn't recover any of the private use cost. If, on the other hand, there is a payment programme where the employee and employer split the cost of personal use, which is the most preferred method right now, the employer can offset some of the cost of the payment programme.
But, besides the typical charges, there are also costs of personal use that most fleet operators do not take into consideration when re-evaluating personal use charges.
Out-of-office mileage has a negative effect on the resale value of the vehicle. The more personal miles allowed, the greater the depreciation of the vehicle. A recent survey showed that about 18% of the overall miles a vehicle makes during its service life are personal miles. Every extra mile driven shortens the vehicle's service life and reduces the residual value of the vehicle. This means that the particular vehicle will reach its optimal mileage replacement much sooner than expected.
For example, a fleet delivery truck averages around 13,000 miles annually, in the US. Add to that an approximately 3,200 miles (at an average personal use rate of 15%) that come from personal use. Commercial fleets usually keep delivery trucks in service for 36 months. With an average of 3,200 personal miles per year, almost four months of the vehicle's 36-month service life have been used by the employee for non-business-related use.
That aside, the extra miles driven for personal use also shorten the lifecycle of essential and costly parts, such as brakes and tyres. This means that they will need to be replaced earlier than normal, at company expense, of course.
There are specific reporting requirements regarding personal use that employees need to know. After they ensure adequate insurance is in place to cover personal use of fleet vehicles, they are called to provide personal use as an employee benefit, and report it to the HMRC (see the HMRC rules on reclaiming VAT on fuel and business mileage). In other words, the extent of an employee's compensation related to personal use of a fleet vehicle, including the value of the fuel paid for driving that vehicle, should be properly measured and reported.
Calculating taxable benefits is a real administrative nightmare, which increases the organisation's overhead by demanding significant administration (i.e. someone must monitor who reports personal use mileage and who is not, whether drivers are keeping accurate business records about the miles driven, audit driver statements of personal use mileage, send notices to the drivers that have not yet sent a report, etc.). This is extremely time-consuming, especially if a staff member will have to chase those drivers that fail to report personal use mileage consistently. It is also costly as you are diverting the organisation's staff from their other duties.
There are cases when two or more employees share the same company vehicle for personal use (pool cars – check out the HRMC tax warning; it could change the game completely in the coming years). This can cause even more headaches to the employer, given that each employee should pay taxes on their usage of the company car. This means that the company will need to calculate the cash equivalent of the fleet vehicle as if each of the different drivers had exclusive use, though a complicated process.
First of all, it is paramount to define personal use, establish what the value of that use would be (i.e. use cents/mile valuation, fair market value, annual lease value, and additional costs, such as fuel), find a way to capture mileage (i.e. odometer reading) and then differentiate personal and business mileage. Don't forget to consider the total cost to the company rather than just the employee taxable benefit (i.e. the cost of maintenance, fuel, insurance, and programme administration).
So, it is important to know when part of the fleet is being used for personal use, who uses it, and how many miles he drove. Tracking business vehicles is absolutely legal in the UK, provided the employee that is driving the vehicle has been aware of it. One of the most effective ways to track fleet vehicles is by installing a GPS vehicle tracker (here is how to introduce it to the employees to make sure you do not violate the Data Protection Act).