Tax & Accounting News

The Rising Cost Of The Car Fuel Benefit

19/02/2008

Where a director, or an employee, is taxable on an employer provided car, then if private fuel is provided as well as the car, there is an additional benefit for tax purposes.

The car fuel benefit is set to increase considerably from 6 April 2008. With such large increases in the pipeline, thought needs to be given by employers and employees as to whether the employee would be better off if they provided their own fuel and claimed a mileage allowance from their employer for business travel.  

As the costs of motoring and fuel increase, businesses need to consider their car policies prior to April 2008. In this letter we set out details of the increase and look at the implications.

When does a fuel benefit arise?

The car fuel benefit can arise if any sum is paid in respect of expenses incurred in providing private fuel for the car e.g. if the employer provides a company fuel card to pay for fuel. However, the car fuel benefit also covers situations where:

• an employee is able to claim reimbursement of all fuel costs; or

• a credit card or voucher is used either to obtain fuel for the car or to obtain money which is so spent.  

How much is the benefit?

From 2003/04 onwards, the car fuel benefit is linked to the level of the car's CO2 emissions. The CO2 emission percentages that apply in determining the company car benefit are also used in the car fuel benefit calculation but, instead of applying the percentage to the list price of the car, the percentage is applied to a figure known as the multiplier.

Since 2003/04, the multiplier has been set at £14,400. However, in the Pre-Budget Report it was announced that this multiplier will increase to £16,900 in April 2008, a 17% increase!

Example

Jane is provided with a company car and all her fuel for 2007/08. The car has CO2 emissions of 204g/km and a petrol engine.

The appropriate percentage for the car is 27%. The cash equivalent of the car fuel benefit is £3,888 (£14,400 x 27%).

Under the new rules for 2008/09 announced some time ago, the CO2 emissions percentage increases to 28%. When this is applied to the new multiplier of £16,900, the car fuel benefit increases to £4,732 (£16,900 x 28%), an overall rise of 21.7% for the employee! And the employer’s Class 1A NI, based on the taxable benefit, will also increase.

Revisit your policy

In order to make a car fuel benefit financially worthwhile, private mileage will need to be substantial. Whilst each computation will be different, due to differing levels of the benefit, fuel costs, fuel consumption of the car in question, etc, as a rule of thumb an employee would need to be travelling at least 10-12,000 private miles per year to make the benefit efficient.

An alternative?

HMRC publish rates which can be used to reimburse employees tax free for business miles that they travel in an employer provided car. These rates increased for journeys undertaken from 1 January 2008.

Engine size	Petrol	Diesel	LPG
1400cc or less	11p (10p)	11p (10p)	7p (6p)
1401cc – 2000cc	13p (13p)	11p (10p)	8p (8p)
Over 2000cc	19p (18p)	14p (13p)	11p (10p)

Other points to note

The operation of the car fuel benefit can be complex and can cause compliance problems. Below we list other issues to consider.

• The benefit can be reduced to nil if, in the tax year in question, fuel is made available only for business travel, or if the employee is required to make good the whole of the cost of the private fuel provided. However, extremely good systems are required to do this.

• Where the car is only available for part of the tax year, the fuel benefit is proportionately reduced.

• Apportionment is also available where private fuel is provided for part of a tax year. However, apportionment is only available on the withdrawal of the provision of private fuel, provided that it is not reinstated later in the same tax year.

Please contact us if you would like to discuss any issues arising from this letter.

 

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