Lambert Chapman's Nick Forsyth asks, "Still paying tax on fuel for your company cars?"

Many tax payers have a company car and some still have the business pick up all their fuel costs and pay tax on this benefit for “ease”. This may not, however, be the most sensible way of dealing with a remuneration package and as the new tax year approaches now might be an opportune time to reconsider prior to the start of the new tax year.

Let’s begin by considering how the system works. Traditionally the fuel benefit was calculated by reference to the cylinder capacity of your vehicle with smaller engines being treated more favourably than their larger more powerful counterparts. Following the change over to CO2 emissions a “multiplier” was calculated so that the CO2 emissions bandings could be used for both the car scale charge and the fuel benefit. This multiplier was set at £14,400 and this figure has stood since 2003/04.

With the increases in fuel costs we have seen in this period HM Revenue & Customs have decided to increase the multiplier from 6 April 2008 to £16,900. As a result you might find it cheaper, either as a company car driver or for your company car drivers, to remove the benefit and let the drivers pay for their own fuel.

For the driver this would have the following impact:

1. Reduce the personal tax paid and see an increase in their net pay.
2. Increase their personal monthly costs as they pay for all of their fuel.
3. Make the driver have to account for his business mileage so that it can be reimbursed.

For the business there would be the following consequences:

1. The business pays only for the fuel used to undertake its operations.
2. As a result of removing fuel from the benefits offered it saves the cost of Class 1A NIC on the fuel benefit charge. This like Employers National Insurance is 12.8%.

In making assessments employees need individual calculations as their private mileages will differ. If private mileage is low then it is likely to show that paying for private fuel will benefit both parties but if they are very large then this may not be the case. When considering such a project there may be winners and losers so an across the board policy may be difficult to implement without some incremental pay awards to those who are disadvantaged.

In order to understand this fully an example might be helpful. Taxpayer drives a diesel 320SE BMW which has a taxable percentage of 18%. In the current year this would produce a fuel benefit of £14,400 x 18% = £2,592 which if a 40% tax payer would cost £1,036 or £86 per month.

If the net private fuel costs per month were less than £86 then the employee would be better off to meet their own fuel costs. To decide this one would need to calculate the total mileage and its cost before deducting from this the business mileage costs which would be reimbursed at 11p per business mile.

As the multiplier has risen to £16,900 per annum the tax costs for receiving fuel are increasing to £101 per month. The reimbursement price for fuel will be reviewed and if revised the new figure will apply from 1 July 2008.

My team will be available to help you review your company fuel policy so that you are able to make a positive decision in this area. Staff will always be happy if they pay less tax and if the company can control and reduce costs this might be an important “win win” situation. If you want to discuss this further please telephone me on 01376 326266 or send me an email.

Date:30 March 2008