If your business provides company cars you need to take extra care in accounting for the cost of fuel. Get it wrong and your business and the driver will be hit with hefty tax and NI bills. What’s the problem and how can you avoid it?
Who’s paying the fuel bill?
As fuel prices fluctuate, keeping track can be a headache, yet some firms are blissfully unaware of the potential tax trouble of not doing so for those driving company cars. Ifthe driver pays for fuel, the business will usually reimburse them. Whereas if thebusiness pays it’s usual for the driver to reimburse it for fuel they use for private trips. It’s these arrangements that tax inspectors keep close tabs on.
What’s the trouble?
There are three areas of tax you need to watch out for: income tax on benefits in kind (BiK), employers’ NI and VAT.
Tax trouble. If fuel in a company car is used for private journeys, a taxable BiK is triggered which can be disproportionately high. The same BiK applies whether thevalue of the fuel provided is £1 or £1,000. For 2015/16 it’s £22,100. This figure is multiplied by the percentage rate used to work out the BiK for the company car, which is linked to its CO2 emissions.
Example. Acom provides a car to a director who uses the company credit card to payfor fuel. The CO2 related percentage for the car BiK is 25%. The director usually keeps a record of the miles he travels on private journeys and reimburses Acom an amount to cover this. He forgets to do this one month. While the value of fuel forprivate journeys was, say, £30, he’ll be taxed on a BiK of £5,425 (£22,100 x 25%). As a 40% taxpayer he’ll have to pay HMRC £2,170. That’s bad enough, but it gets worse.
NI trouble. Because the director is liable to a BiK charge, his firm also has to pay Class 1A NI. The amount payable is 13.8% of the BiK, i.e. £749 (£5,425 x 13.8%). Thedirector’s forgetfulness has cost £2,919 in taxes, just for the sake of £30 worth of fuel.
VAT trouble. The semi-good news is that since 2013 the VAT consequences for a business paying the cost of fuel for private journeys isn’t as dramatic as for tax and NI. However, the business must still account for VAT on the value of the fuel it provides for private journeys made in any car, not just company-owned ones. There are a few ways to work this out. However, because of the tax/NI charges it’s usually more tax efficient to avoid paying for fuel for private journeys in company cars, in which case VAT doesn’t need to be considered.
To avoid tax and NI on company car fuel it must be a requirement that the driver makes good (reimburses) the cost of fuel paid for by the business and used for private use. Plus, the business must not reimburse more than a reasonable mileage rate to employees for fuel they pay for which is used for business journeys. You can use HMRC’s general advisory fuel rates (AFRs) or negotiate your own rates with the tax office
Make sure that company car users keep an up to date log of all private mileage so that you can accurately work out how much the reimbursement should be.
The tax and NI on private use of fuel in a company car is based on a fixed charge of £22,100 per year (for 2015/16) regardless of the amount of mileage and can therefore be disproportionately high. To avoid the charge arising ensure that fuel is only reimbursed at HMRC’s advisory rate or one that you have negotiated.