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Recruiting employees? Beware ‘free’ fuel benefit that isn’t free

To recruit the best talent, you need to provide an attractive pay package. For many employees having the fuel they use in their company car paid for by their employer is an attractive benefit, since they are covered for business miles and private use. But remember that changes in HMRC tax policies mean ‘free fuel’ is now taxed harder as a benefit in kind which can make it less attractive.

The reason this benefit now isn’t as good as it sounds is because the tax charged isn’t related to the amount of fuel used. So, if your employees or future employees have low private mileage it’s likely to be a tax cost not a perk. Well-informed new recruits won’t want it as part of their benefits package.

What you need to know about personal mileage
You must remember that for all employees, journeys to and from work are personal mileage, which is why we always make the point to inform clients that ‘enjoying’ free car fuel for their private mileage can often be a bad deal.

If, for example, you have a diesel car with CO2 emissions of 140 grams per kilometre, you pay 120 pence per litre for fuel, manage an average of 35 miles per gallon, and are a 40% taxpayer, you would need to drive more than 17,000 private miles during the current tax year before you were better off with the so-called benefit.

If, in the same situation, you are also the owner of the company, there would be the additional cost of Class 1A contributions on the benefit.  After corporation tax relief this would cost the company an extra £758 so you would need to clock up private mileage of over 22,000 miles before you were ahead of the game.

Even with a petrol driven car with CO2 emissions of 105 g/km, you would still need to drive more than 11,500 private miles (or 14,500 private miles for the company owner) in order to really benefit from ‘free’ fuel.

If you are currently receiving free fuel and, in the light of the above, decide to stop, you will only be charged the fuel benefit for part of the tax year, provided you don’t revert to free fuel before the end of the tax year.

What can you do?
There are a number of ways to position your business to attract the right candidate and be canny about fuel costs and the tax on fuel as a benefit in kind. We suggest you could:

  1. Provide employees with a fuel card but have a policy which requires them to repay the company the cost of private mileage, so as to minimise their tax bill. It would be attractive not having to pay company mileage out of their day to day salary, especially when the price of fuel is so high. Plus, it would be fairer on you as the employer, that their private mileage is repayable and cut out the administration of handing expenses claims. We can advise you on the most efficient ways for your employees to accurately record their private mileage.
  • Make a policy that instead of having the ‘free’ fuel benefit; employees reclaim the cost of business miles on expenses. The HMRC rate for 2018/19 is 45p per mile for business mileage only; and after 10,000 business miles it is 25p per mile.
  • Look into introducing electric cars and providing charging stations at your premises if the current capability of the cars is suitable for your business. In the previous Autumn Budget 2017, the Chancellor announced that from 6 April 2018 no benefit in kind will arise where fuel is provided for an electric car. This is because tax law does not treat electricity as a ‘fuel’, and therefore the usual fuel benefit charge for company cars (s149 ITEPA 2003) cannot apply.

It’s worth noting that pure electric cars and vans are exempt from paying Vehicle Excise Duty (VED) and cars that emit less than 75g/km CO2 will pay less road tax in the first year, delivering additional cash savings for electric models if your company has a fleet to support.

  • Introduce working from home if the journey from the employee’s home is closer to the destination they need to get to using company mileage. If their usual commute to the office is 1 hour (which is considered ‘private mileage’) but they would then have to complete a longer journey on company mileage, homeworking could be a better option for both them in terms of comfort, and for you in terms of cost.

Be warned!
If you are currently offering free fuel to your employees and have decided to stop, they will only be charged the fuel benefit for part of the tax year, provided you don’t revert to free fuel before the end of the tax year.

However, if you already offer a company car but no free fuel, and you decide to start offering the free fuel benefit you should make sure you do so at or close to the start of the tax year as possible. This is because employees will be charged the benefit for the full tax year regardless of when they start to take the
benefit.

Would you like specific advice?

For an objective view of your options, we’d be pleased to talk it through with you. Please give us a call on 01992 444466 or email directors@hbaccountants.co.uk and we can advise you.

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