TT127 Company Car Fuel Update
When is a benefit not a benefit?
Employees often still regard the provision of a company car as a benefit worth having. The certainty of the tax cost is attractive when compared to the uncertainty of maintenance and depreciation. Employers also regard company cars as important to ensure that staff are motivated and able to travel for their job in a reliable and presentable fashion.
However, the tax on a company car is split into two parts. Firstly the tax on providing the car and secondly the tax on the provision of fuel that includes private travel (e.g. home to work, social and domestic). Wisely, many employees choose to drop the private fuel element of the benefit package and just claim for the business mileage incurred (see below), which paradoxically saves them (and the company) money.
What is the saving?
Consider an average car; say a 2.0L petrol Ford Mondeo Estate. This has CO2 emissions of 189 g/km. Therefore for 2008/09 the fuel benefit is 25% of the fuel scale multiplier of £16,900, so the taxable benefit is 25% x £16,900 = £4,225.
Assuming the car does 30 mpg, the employee pays tax at 40%, they do 10,000 private miles per year and the cost of petrol is £1 per litre then the following calculation shows the wisdom of not taking the private fuel benefit:
Cost to the company if private fuel paid for:
| Private fuel (net of VAT) | £1,290 (£1,515 including VAT) |
| VAT scale | £174 |
| Class | 1A NIC £541 |
| Total Cost | £2,005 |
And the cost to the employee is:
| Tax on benefit | £1,690 |
If the employee paid for all the fuel and reclaimed the Advisory Fuel Rates then they should break even on the fuel cost for the business miles. However, they would save £1,690 in tax and only pay out £1,515 in private fuel costs. The company would save £2,005. Hence, the employee will be absolutely better off by £175 per annum and the company by £2,005.
Of course, many employees will do far fewer than 10,000 private miles and the savings will be considerably more.
The company can choose to share the benefit with the employee as a sweetener for the change in the arrangements.
(the above calculations are at the 17.5% rate of VAT, but even at 15% there is little change in the benefit!)
Business mileage rates
In TT107 we reported on the new rates to be used for paying the fuel only element to employees who claim for business miles driven in company cars. (Remember, this applies only when the employee pays for all their fuel and only claims back the business element.)
From 1 July 2008 the rates have changed to:
Advisory Fuel Rates
| Engine Size | Petrol | Diesel | Lead |
| 1,400ccor less | 12p | 13p | 7p |
| 1,401cc to 2,000cc | 15p | 13p | 9p |
| Over 2,000cc | 21p | 17p | 13p |
However, due to the very steep rise in petrol costs HMRC have stated that they are happy for the new rates to be backdated to 1 June 2008.
This can be checked on http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm
As the rates have gone up you could review all payments made since 1 June 2008 and increase the tax free compensation to employees. The next potential review of these figures will be from 1 January 2009.
Barnes Roffe Topical Tips
- Paying only business mileage for a medium to large car fleet could save a serious amount of money.
- Under the rules an employer can change from paying for all fuel to paying for only business fuel during the year and not just at 5 April.
- Look into this area for immediate action
- If your mileage varies greatly from the above we can undertake a calculation for your individual circumstances.
- Remember that you and your employees must keep a log of the business miles claimed or else HMRC will seek to tax the payments.
Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.
Barnes Roffe Topical Tips:
- Get advice to ensure you make the most of IHT reliefs and exemptions.
- Ongoing planning can significantly increase your kids’ inheritance.
- Remember APR only applies to the value of land and buildings used for farming. Any non-farming value - such as development value - is excluded.
- BPR is available for qualifying businesses and assets. This may include the value of land owned by the business, including its development value.
- Do not assume that because you own a business it will qualify for BPR - there are conditions and restrictions that could exclude or reduce the relief.
Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.
