Given the increases in the scale charge, fuel price rises and more fuel-efficient cars; employers who take the time to review their overall position can often find that most of their company car drivers would benefit from the replacement of private fuel with an alternative.
Some drivers will evaluate the benefit and tax cost to them and their ‘breakeven’ point, and choose to voluntarily ‘opt out’ where the tax cost is higher than the fuel used. However, it is less common for the employer to review the total cost of the fuel (including all taxes) to ascertain its own breakeven position.
The overall cost of providing fuel for private travel to company car drivers includes:
- the tax payable by the driver, plus;
- the cost of the fuel itself;
- the Class 1A National Insurance (NIC) payable by the employer; and
- the VAT scale charge.
The combined total of all these costs can be twice the pump price, sometimes more.
Because of the financial inefficiencies of this benefit in kind we work with employers to ascertain:
- the true cost of providing private fuel to company car drivers;
- the savings that may be generated by restructuring the position; and
- how to continue to manage any employment tax risk around the provision of business fuel following any changes.
The potential savings
Savings in the region of £2,000 per car per year are not uncommon.
The employer may also benefit in the following ways:
- reduced annual mileage in company cars and lower fleet maintenance costs;
- decreased fuel costs through use of cheaper filling stations; and
- removal of the ‘blank cheque’ where employees purchase unlimited amounts of fuel for private travel.
The level of an employee's savings will depend upon their personal circumstances. There will be employees for whom their own tax savings will cover the cost of their private fuel, for others some form of buy-out may be needed. Employers can also share some of their savings with employees to encourage participation in the revised arrangements.
Points to consider
There are several practical issues that employers need to consider in evaluating the savings and designing alternative arrangements which do not impact upon their tax risk profile, for example:
- financial analysis of potential savings versus set-up and administration costs;
- contractual, policy and system changes;
- addressing fuel cost increases or to buy-out at a given point;
- retention of or removing fuel cards;
- mileage records;
- link to business expenses systems;
- sharing of company savings; and
- method and timing of employee communications and timetable to change.
The list below summarises the key benefits to both the employer and employees:
- recurring employer savings, which may be shared if desired;
- reduced fleet costs through reduced (private) mileage and more efficient driving;
- remove uncapped fuel costs; and
- removes exposure to fuel price rises on private travel and increased NIC/VAT costs on future scale charge increases.
The example below is based on the following scenario:
- higher-rate taxpayer;
- 2019/20 tax year;
- full VAT recovery by employer;
- 28 per cent benefit-in-kind charge;
- fuel efficiency of 50 miles per gallon; and
- diesel at £1.30 per litre.
NB - All figures are before corporation tax relief
|Private mileage per annum|
|Tax at 40%||2,699||2,699||2,699|
|Cost of private fuel||1,182||1,773||2,364|
|Net benefit to employee||(1,517)||(926)||(335)|
|Gross 'buy out' payment||0||0||0|
|Class 1A NIC||931||931||931|
|VAT scale charge||99||99||99|
|Cost to employer||2,015||2,508||3,000|
|Gross 'buy out' payment||0||0||0|
|Annual saving to employer||2,015||2,508||3,000|
How can RSM help?
We help client employers with the following, working with in-house teams and business expense system/fuel card providers where necessary:
Financial modelling and calculations
Calculating the amount required to maintain a cost neutral position for the employee, together with the savings generated for the employer. This data on savings is also helpful support for any business case for making the change(s).
Tax and NIC
Ensuring changes are tax and NIC compliant; the risks of the benefit in kind position still applying are avoided and all required record-keeping is robust yet administratively straightforward.
Requesting confirmation from HMRC that any changes remove the benefit in kind charges.
Looking at the ways in which the scheme should be implemented. For example, what should happen where tax and NIC rates change, or if an employee’s role and travel changes?
Establishing any system changes that may be required to payroll, business expenses and mileage record capture.
Setting out the overall implementation costs, the anticipated timescale for implementation and the return on investment (again helpful for business case documents).
Developing an employee communication strategy aligned to your preferred and available communication media.
For further information, contact Mark Morton.