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Topical Tips
127
November
2008 |
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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. |
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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 charge |
£174 |
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Class 1A NIC |
£541 |
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Total cost |
£2,005 |
And the cost to the employee is:
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!)
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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 |
LPG |
|
1,400cc or less |
12p |
13p |
7p |
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1,401cc to 2,000cc |
15p |
13p |
9p |
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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. |
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Paying only business mileage for a
medium to large car fleet could save a serious amount of money.
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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.
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Look into this area for immediate
action
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If your mileage varies greatly
from the above we can undertake a calculation for your individual
circumstances.
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Remember that you and your
employees must keep a log of the business miles claimed or else HMRC will seek
to tax the payments.
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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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