TT127: Company Car Fuel Update

November 22, 2008

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.
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