TT53: Private Fuel for Company Cars

Your company car tax review starts here

Car taxation remains an area where employers find it hard to judge where a cost saving can be made and, if it can, hard to communicate the nature of the saving to employees. While company car taxes are complex, the the simplest aspect to consider is whether the company should provide private fuel for company vehicles.

What are the fuel rules?

If you as employer provide a company car for your employee you can choose to provide all fuel for the vehicle (i.e. both private and business use) or just reimburse the cost of business fuel.

If you provide all fuel, the accounting and tax treatment is straightforward, although expensive! The employer pays the fuel and claims the VAT back, but has to pay a flat rate VAT scale charge (based upon engine size) and Class 1A National Insurance on the benefit in kind (“BIK”). The employee will have to pay income tax on the BIK at their highest marginal rate. Since 6 April 2003 the private fuel BIK for the employee has been calculated by multiplying the scale charge percentage for the vehicle (based upon the CO2 emissions) by £14,400.

Alternatively, if the employee pays for all fuel then claims back the business mileage, the employee can be reimbursed by the employer at the Advisory Fuel Rates and incur no income tax charge. These rates are published annually by the Inland Revenue and for 2004-05 the rates for fuel are:

Engine sizePetrolDieselLPG
Under 1,400cc10p9p7p
1,400 to 2,000cc12p9p8p
Over 2,000cc14p12p10p

The employee will pay tax on the benefit of having a company car, but pay no tax for private fuel. It goes without saying that a proper mileage log must be kept.

The saving if private fuel is not paid

Consider the following example:

Car

BMW 318i (petrol)

Scale Charge

21%

MPG

30

Petrol per litre

80p

Employee’s rate of income tax

40%

Private mileage

10,000 p.a. (including home to business premises)

Cost to the company if private fuel paid for:

Private fuel costs (net of VAT)£1,031
VAT scale charge£175
Class 1A NIC£387
Total cost to the company£1,593

Cost to the individual of only claiming business fuel:

Private fuel cost (inc. VAT)£1,210
Income tax saved(£1,210)
Net cost to employeeNIL

Conclusion

The employee is break-even if they pay for their own private fuel, but the employer has saved £1,593 with which to compensate the employee for the change and keep the rest of the saving for itself.

Barnes Roffe Topical Tips

  • Paying only business mileage for a medium to large car fleet could save a serious amount of money.
  • Under the new 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.

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.

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