As a business owner, you make important decisions each day. While you may be able to make some decisions without blinking an eye, others take more thought and consideration. One of those decisions might be managing business travel expenses.
There are two main ways of offering business travel benefits to employees: providing a company car or a mileage allowance. Both have their advantages and disadvantages, making it important to evaluate these factors in the context of your business.
In this article, we’ll take a deep dive into the pros and cons of company cars and mileage reimbursment, helping you make a smart, strategic decision.
Upfront Cost
The first factor to evaluate when deciding how to manage business travel expenses is the upfront cost. Providing employees with a company car will come with a greater upfront cost. After all, cars can be expensive to purchase. On the contrary, mileage allowances do not come with an upfront cost. Employees will be reimbursed as they incur expenses.
Let’s say that you are growing your sales team by adding two new staff. When providing a company car, you would need to have the funds to purchase or finance two vehicles at the same time. Keep in mind that company cars are business assets, which can increase the strength of your fixed assets and lead to exclusive tax deductions. These factors can help lower your upfront costs.
Let’s say that you have a sales team of five. Each team member drives an average of 2,000 KM per month. The upfront cost of purchasing a 2025 Volkswagen Golf GTI, which is a common business vehicle, is around €27,500. Multiply this by five, and your upfront investment is €137,500.
In case of mileage allowance, assuming that each employee drives a vehicule that falls under a 5CV category, each employee would be reimbursed at €0.636 per KM. Your total reimbursement for the month would be €6,360, which is under 5% of the upfront value of purchasing company cars.
Ongoing Costs
While company cars generally cost the most upfront, there are ongoing costs to consider. Company cars will need regular maintenance, such as oil changes and tire rotations, in addition to gas cost.
Mileage reimbursements are also an ongoing cost. Employees will submit claims as they incur mileage, such as weekly, bi-weekly, or monthly. The reimbursement rate is generally based on factors outside of your control, such as rates set by the government.
The estimated annual maintenance cost for a 2025 Volkswagen GTI is €223 during the first year. For a fleet of five company cars, this would be €1,115. Using the facts from our above example, let’s say your five team members drive 2,000 KM each month. This equates to 10,000 KM each month or 120,000 KM each year, which would cost your business €76,320.
While running a mileage reimbursement plan can be more expensive in the first few years, it’s important to consider that maintenance on company cars does get more expensive as the car ages.
Flexibility
Company cars aren’t always as flexible as mileage allowances. Employees have little to no control over the type of vehicle the company issues, which can cause problems. When employees choose their own vehicles, they have complete control over the vehicle model, features, and personal use.
Employee Satisfaction
Offering company cars can be perceived as a perk, helping you attract talented labor. This has the potential to boost employee morale and reduce stress when employees aren’t required to pay for wear and tear on their personal vehicles from traveling.
Employee satisfaction related to mileage reimbursement depends on your company’s policies. If an employee gets a flat tire on the way to visit a potential client, is that covered? Will you cover their oil changes and regular maintenance, or will you just offer a mileage reimbursement? Improving employee satisfaction relies on creating equitable and fair reimbursement policies and standards.
Tax Implications
The tax-efficient benefits of company cars and mileage reimbursements depend on your company’s policies. Mileage reimbursements are generally easier to keep track of from a tax standpoint. Mileage reimbursements with adequate support are considered a tax-free fringe benefit, meaning the reimbursements are not taxable to employees. The reimbursements paid are a tax-deductible business expense for the employer.
Company cars can be more difficult to maintain. If your employees submit reimbursements for gas and maintenance, the reimbursements are generally tax-free fringe benefits and deductible by your business as an expense. However, if employees are using the company vehicle for non-business purposes, those miles are a taxable fringe benefit that will need to be added to their year-end tax forms.
Administrative Burden
Keeping track of business travel expenses can be a burden for your admin team, regardless of whether you offer a company car or mileage reimbursement. When using company cars, your admin team will need to keep track of how the cars are assigned and when maintenance is needed.
When using mileage reimbursements for business travel expenses, your admin team will need to go through expense claims on a regular basis to issue reimbursements. Both can take valuable time away from your admin team.
Fraud and Abuse
Both company cars and mileage reimbursements open the door for fraud and abuse. Company cars can be abused by employees using them for non-business purposes, such as going on a personal vacation. It can be difficult to catch this type of abuse without requiring employees to submit detailed records and travel logs.
Similarly, mileage reimbursements can also increase your risk of fraud. Employees could overstate their mileage to receive a larger reimbursement. Once again, requiring detailed travel logs and keeping track of all information in a unified expense management system will be important to deter fraud and abuse.
Regardless of which option you choose, it’s important to have the right fraud prevention and detection controls in place when managing business travel expenses. Programs, like N2F can connect to Google Maps, with an automatic calculation from start to endpoint to ensure employee travel logs are accurate. Another option is to require travel requests to manage business travel upfront.
Company Car vs Mileage Reimbursement: Which Should You Choose?
How are you planning to handle business travel expenses? Offering a company car can be a great way to improve your brand visibility, provide an extra perk for employees, and have more control over vehicle maintenance. However, company cars come with a larger upfront cost, have confusing taxable fringe benefits, and can increase the potential for abuse.
On the contrary, mileage reimbursements give your employees more flexibility in choosing their vehicle, have lower upfront costs, and can have more tax-efficient benefits. Just like company cars have disadvantages, so do mileage reimbursements, with the potential for overstated mileage hours and a higher admin burden.
The decision on which route you want to go for your business travel expenses is highly dependent on the factors of your organisation. For example, if you need to reimburse employees for more than just mileage, such as for continuing education or other travel costs, creating a robust expense reimbursement function might be beneficial.
Regardless of which route you take, it’s important to have an expense management software program working alongside you. Reach out to our team at N2F today to get started with your free consultation. Let us help you reduce your admin burden of tracking business travel expenses.
