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Company was liable for employee’s tax claim for tax-free mileage allowance

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Legal news
calendar 20 December 2019
globus Denmark

An employee who was entitled to tax-free mileage allowance later received a claim for unpaid taxes of the benefit. Because the company had failed its obligation to check the documentation properly, the Danish tax authority, SKAT, had rejected the mileage allowance as tax-free. The Danish Western High Court found that as the decision was due to the company’s circumstances, the company was liable for reimbursing the employee for his loss.

For the performance of his work, a construction manager was required to drive to a construction site in another city. However, as the company did not make company cars available and the employee therefore had to use his own car, they agreed that he would be entitled to tax-free mileage allowance. As part of the documentation requirements to SKAT to receive the tax benefit, the employee would prepare the necessary mileage documentation, including information on which dates and the number kilometers he used his car. The employee was never instructed or received guidelines on how to prepare the necessary documentation. He therefore used an app for this purpose. In the course of his employment, the employee drove approximately 260 times per year. Only on one occasion, did the employee receive a remark on the documentation from the company’s bookkeeper.

About one year after he resigned, the employee received a declaration from SKAT rejecting his entitlement to tax-free mileage allowance. SKAT’s decision referred to the company’s failure to document that the proper checks had been carried out with respect to the documentation submitted by the employee. More specifically, SKAT concluded that the number of kilometers indicated by the employee did not correspond to the information on the provided bridge. Due to the company’s failure to check, the employee was liable for unpaid taxes amounting to approximately DKK 82.000.

Pursuant to the employee, the company was liable for the loss he had suffered as a result of the company’s lack of checking. Therefore, the court had to assess whether the company was liable for the fact that the mileage allowance was taxable.

Liability for failure to properly check documentation om mileage

According to the company, employee had not suffered any loss as he had been paid what he was entitled to during his employment. At the same time, the company argued that the entitlement to tax-free mileage allowance was preconditioned upon the employee providing correct information, and that the company in any case could not guarantee that mileage allowance was tax-free.  

The employee disagreed and maintained that tax-free mileage allowance was a condition for using his own car for the performance of his work, and that it ultimately was the company’s own failure to properly check the documentation submitted that resulted in the rejection from SKAT.

Pursuant to the court, SKAT’s rejection was a direct result of the company’s failure to comply with the obligation to check mileage documentation submitted by the employee. If the company had carried out proper checks and ensured adequate documentation hereof, the employee’s error would have been discovered. Therefore, the court found that the company was liable for the loss the employee had suffered.

IUNO’s opinion

Companies are responsible for checking that all conditions regarding tax-free mileage allowance are met and  at the same time for ensuring that such checks are documented properly.

IUNO recommends companies to be aware that this obligation to check also entails that the correct information must appear from the bookkeeping’s own documentation. Also, companies must ensure that information is visibly checked by the company, for instance by application of a signature or stamp. If not, companies may risk being liable for tax claims from employees, if the otherwise tax-free mileage allowance subsequently are ruled taxable by SKAT.

 [Danish Western High Court’s judgement of 7 February 2019 in case BS-8263/2018-VLR]

For the performance of his work, a construction manager was required to drive to a construction site in another city. However, as the company did not make company cars available and the employee therefore had to use his own car, they agreed that he would be entitled to tax-free mileage allowance. As part of the documentation requirements to SKAT to receive the tax benefit, the employee would prepare the necessary mileage documentation, including information on which dates and the number kilometers he used his car. The employee was never instructed or received guidelines on how to prepare the necessary documentation. He therefore used an app for this purpose. In the course of his employment, the employee drove approximately 260 times per year. Only on one occasion, did the employee receive a remark on the documentation from the company’s bookkeeper.

About one year after he resigned, the employee received a declaration from SKAT rejecting his entitlement to tax-free mileage allowance. SKAT’s decision referred to the company’s failure to document that the proper checks had been carried out with respect to the documentation submitted by the employee. More specifically, SKAT concluded that the number of kilometers indicated by the employee did not correspond to the information on the provided bridge. Due to the company’s failure to check, the employee was liable for unpaid taxes amounting to approximately DKK 82.000.

Pursuant to the employee, the company was liable for the loss he had suffered as a result of the company’s lack of checking. Therefore, the court had to assess whether the company was liable for the fact that the mileage allowance was taxable.

Liability for failure to properly check documentation om mileage

According to the company, employee had not suffered any loss as he had been paid what he was entitled to during his employment. At the same time, the company argued that the entitlement to tax-free mileage allowance was preconditioned upon the employee providing correct information, and that the company in any case could not guarantee that mileage allowance was tax-free.  

The employee disagreed and maintained that tax-free mileage allowance was a condition for using his own car for the performance of his work, and that it ultimately was the company’s own failure to properly check the documentation submitted that resulted in the rejection from SKAT.

Pursuant to the court, SKAT’s rejection was a direct result of the company’s failure to comply with the obligation to check mileage documentation submitted by the employee. If the company had carried out proper checks and ensured adequate documentation hereof, the employee’s error would have been discovered. Therefore, the court found that the company was liable for the loss the employee had suffered.

IUNO’s opinion

Companies are responsible for checking that all conditions regarding tax-free mileage allowance are met and  at the same time for ensuring that such checks are documented properly.

IUNO recommends companies to be aware that this obligation to check also entails that the correct information must appear from the bookkeeping’s own documentation. Also, companies must ensure that information is visibly checked by the company, for instance by application of a signature or stamp. If not, companies may risk being liable for tax claims from employees, if the otherwise tax-free mileage allowance subsequently are ruled taxable by SKAT.

 [Danish Western High Court’s judgement of 7 February 2019 in case BS-8263/2018-VLR]

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