2023 Mileage reimbursement rates – what you need to know

Inland Revenue has recently published the 2023 Kilometre Rates, so it’s time to revisit one of our most popular article topics!

What do I need to remember?

The Commissioner of Inland Revenue is required to regularly set kilometre rates so that these can be used by self-employed business owners or close companies to determine available tax deductions for business use of a vehicle (if they chose to use that method). In practice, the same rates are often also used by businesses that reimburse employees who use their personal vehicles for work purposes. Provided reimbursements are made at or below the specified rates, they can be paid “tax-free”.

Use of these rates is not compulsory. Business owners can instead claim deductions for actual costs incurred, and likewise, employers can reimburse employees at higher rates, but records would need to be kept substantiating that the rate of reimbursement is a reasonable approximation of actual costs.

Self-employed and close companies

If you are a sole trader or qualifying close company and use the kilometre rate method to claim business vehicle costs, this new rate applies for the 2023 year, being the year 1 April 2022 - 31 March 2023 if you have a standard balance date. The increase in the rate will increase the amount of vehicle costs you can claim when you file your 2023 tax return. If you have already filed your 2023 income tax return, and relied on the 2022 kilometre rates, depending on the amount of the difference between the two amounts you may be able to self-correct the difference in your 2024 income return or, if the difference is material, file a Notice of Proposed Adjustment (which is only available within four months after the filing of an income tax return).

Employers

If you are an employer and are reimbursing employees for work-related travel, the increased rates apply to reimbursements made from the date that they were issued – 11 May 2023. If your reimbursement policy states that you will reimburse employees at the Inland Revenue rate, you will need to update the rate you pay as soon as practically possible. When rates are increased, a lag in updating rates paid to employees, while potentially disadvantageous to employees, does not cause a PAYE problem.

If your reimbursement policy states a set rate at which you will reimburse work-related mileage, and this is lower than the new rate, you do not need to do anything as the amount you pay will be tax-free, but you may get pressure from employees to increase the reimbursement rate.

The 2023 rates

The new rates have increased from the 2022 rates for all vehicle types, particularly for petrol and diesel vehicles, which reflects the increases in running costs due to inflation.

What does Tier One and Tier Two mean?

The Tier One rates reflect the fixed and variable costs of running a vehicle and can be used for the first 3,500km of business travel, or the business portion of the first 14,000km of total travel in the vehicle. After these limits, the lower Tier Two rates apply (which only reflect variable costs). How to decide on which rate to use is summarised in the flow chart below:

As noted above, it is not compulsory to use the Inland Revenue rates, any reasonable amount can be reimbursed but documentation will need to exist to support any payments that exceed the Inland Revenue rates if you treat these as not taxable.

Practical problems

We have written several articles in the past on the practical problems with the two-tier kilometre rate method particularly for reimbursing employees and suffice to say these still exist where employees are reimbursed for high levels of work-related travel. If you’d like to refresh your memory on these issues, check out our August 2018 article, written when the two-tier system was introduced and our September 2019 article which looked at further modifications to the two-tier methodology.

For more information about applying the new kilometre rates or mileage reimbursement options please contact your usual Deloitte advisor. 

June 2023 - Tax Alerts