NO SUCH THING AS A FREE TANK OF PETROL
With the costs of living being squeezed at the moment it’s tempting to use your company as an open cheque book to subsidise your lifestyle, but when it comes to paying the petrol costs for your company car there could be a nasty sting in the tail.
You could try and be clever and attempt to circumnavigate the company car tax rules, but beware, HM Revenue have a successful track record in this area. In fact, there were two failed attempts recently to claim pool car status which ended up with the businesses being considerably out of pocket to the tax man (“Time For Group Ltd” and “1st Stop 2 Shop” if you’re interested).
So does it make sense for the company to you or your employees with “free fuel” under any circumstances?
The golden rule is that an employee paying tax on the benefit of a company car will also face an additional tax charge for fuel benefit if generally speaking the company foots the bill for any private journeys (as a timely reminder home to office travel is not generally regarded as a business journey).
Whether you’re driving a Smart Car or “S Class” Mercedes it’s therefore important to appreciate just how expensive it could be in tax terms for your company to pay for fuel for private journeys in your company car.
If we use the HMRC advisory rates below from 1 September 2014 as a guideline for diesel costs, it is possible to illustrate how valuable, or indeed how expensive, it is for your company to pay for fuel for private journeys.
HMRC Advisory fuel rates for diesel cars
engine size (CC)
applied FUEL RATE
Up to 1,600
1,601 to 2,000
Ok, let’s apply these figures in two examples.
1. Small car, low private mileage
Pippa works for the family business. Aged just 22, her role involves frequent travel between the three business sites in and out of the Central London congestion zone.
She is provided with a company car with a list price of £12,000 and CO2 emissions of 117g/km.
It has a 1,300 cc engine and runs on diesel. Her annual business mileage is around 12,000 miles and she covers 5,000 private miles in the year.
Pippa passed her driving test less than a year ago and, as a young, newly qualified driver, her insurance costs are very high.
For the tax year 2014/15, the appropriate percentage for the car is 19%, so the taxable benefit for the car is therefore £2,280 (£12,000 x 19%).
If Pippa is paying tax at the basic rate of 20%, the tax cost is therefore £456 a year, or £38 a month.
It makes sense to provide a company car as the high costs of insurance and of the congestion charge can be met by the company, rather than paid for out of taxed income.
Pippa asks for advice about paying for fuel for the car, and gives two options:
should the company simply pay for all fuel, even for private journeys; or should Pippa buy it first and then claim reimbursement for business journeys only?
Using the table above, the total annual cost of fuel can easily be calculated. 17,000 miles (12,000 business and 5,000 private) in a car that achieves 51.9 mpg equates to an annual fuel consumption of 328 gallons. With a conversion rate of 4.546 litres to the gallon, this is equates to 1,491 litres.
At 140.4 p a litre, the total fuel cost for the year comes out at £2,093 (of which £1,477 is for fuel for business journeys and £616 is for private mileage).
If Pippa pays for the fuel herself, she can claim reimbursement from the company for the 12,000 business miles.
The advisory fuel rate for a small diesel car is currently 11p a mile, so the company can reimburse her £1,320 tax-free. The cost to her of buying her own fuel is therefore £773 (total cost of £2,093 above, less the tax free payment of £1,320).
However what is the cost if the company pays for all fuel for the car (including all private mileage)?
The additional taxable benefit is calculated (for 2014/15) by applying the 19% figure, the same percentage as it used to calculate the car benefit charge, to a fixed amount of £21,700.
As such, Pippa would pay tax on a fuel benefit of £4,123. Assuming that the additional benefit is still taxed at 20%, the cost is therefore £825.
From Pippa’s perspective, she is marginally worse off if the company pays for the fuel for her private journeys.
However, there are significant extra costs for the company, falling into two categories.
The company is now paying more for fuel. Whereas before it was reimbursing £1,320, it is now paying the actual cost of £2,093, leaving it worse off by £773.
It also has to pay Class 1A National Insurance on the benefit of £4,123, which at 13.8% is an additional cost of £569.
The additional costs to the company of paying for all fuel therefore come out at £1,342, (actual cost of £773 plus Class 1 A NIC of £569) whereas Pippa’s own position is broadly neutral.
For the company to pay for private fuel is therefore a very expensive option. Indeed, the additional cost would be enough to pay Pippa, net of employer National Insurance, an additional gross salary of nearly £1,000.
You’d be forgiven for thinking that a very different result would arise if the level of private mileage is much higher. In reality, though, a similar outcome may arise.
2. Large car, high private mileage
Pippa’s father Michael, a director and higher rate taxpayer, also drives a company car. In his case, the list price is £40,000 and CO 2 emissions are 202g/km.
It has a 2,500cc engine and again runs on diesel. His annual business mileage is just 6,000 miles but he lives a long way from work and his annual private mileage, including daily commuting, comes to 24,000 miles.
For the tax year 2014/15, the appropriate percentage for the car is 35%, after adjusting for the diesel loading. The taxable benefit for the car is therefore £14,000 (£40,000 x 35%). As a higher rate taxpayer, this costs him £5,600 a year (£14,000 x 40%).
The cost of the fuel can once more be calculated using the table above.
With total annual journeys of 30,000 miles, a figure of 35 mpg gives an annual consumption of 857 gallons or 3,896 litres. At 140.4 pence a litre, the total fuel cost for the year comes out at £5,470.
If Michael pays for the fuel himself, he can claim reimbursement from the company for the 6,000 business miles.
The advisory fuel rate for a large diesel car is currently 17p a mile, so the company can reimburse him £1,020 tax free.
The cost to him of buying his own fuel is therefore a whopping £4,450 (£5,470 less the tax-free reimbursement), and it might be thought that in these circumstances the fuel benefit would be worth incurring.
So what is the position if the company pays for all fuel for the car, for both business and private journeys?
The additional taxable benefit is calculated as £7,595 (£21,700 at 35%). The cost, at 40%, is thus £3,038.
Michael is better off by £1,412, as the cost of paying for his private fuel himself equates to £4,450 as opposed to the tax charge of £3,038.
However, what is the company’s tax position?
Well for starters, the company must now pay £5,470 for the fuel, as opposed to the reimbursement of £1,020, an additional cost of £4,450!
The company must also pay National Insurance on the fuel benefit of £7,595, giving a further expense of £1,048.
If we add the two together this means that the company will save £5,498 if it does not foot the bill for Michael’s private fuel costs.
This £5,498 could be put to better use by paying Michael a bonus, rather than paying for his private fuel. Net of Class 1 National Insurance, a bonus could be paid of £4,831. After deducting 40% tax, and 2% National Insurance, Michael would receive £2,802.
Therefore if the company pays for fuel for all journeys, Michael will suffer a tax cost of £3,038 this being the charge on the taxable fuel benefit figure referred to above.
If the company is left in a neutral position, Michael can instead pay for the fuel himself (£5,470) but can be reimbursed by the company for business journeys (£1,020) and can also then receive an after tax bonus (£2,802), giving him a net cost of £1,648.
He could therefore save nearly £1,400 for the year if he pays for his own fuel for private journeys.
A price worth paying?
Therefore even in Michael’s case, where there is a very high level of private mileage, the individual is significantly better off avoiding the fuel benefit charge.
Given that the tax charge has increased rapidly in recent years, company car drivers can in principle choose to pay for their own private fuel and thus avoid the tax hit, it is therefore doubly important that you make sure that wherever possible you avoid unintentionally reimbursing private fuel costs for your company car.
And remember, these tips are not a replacement for professional advice tailored to your precise needs and circumstances.