When does a company car fuel benefit arise?
A company car fuel benefit arises whenever any fuel is provided by reason of employment, to an employee or director, in respect of a car that attracts a company car benefit charge. The car fuel benefit which arises is in addition to the company car benefit.
The definition of “provided” for these purposes has a wide meaning which is specified in legislation, and will catch most ways in which an employer normally deals with the provision of fuel to employees.
The relevant percentage set for the company car (which is linked to its CO2 emissions) is used to calculate the car fuel benefit. This is done by applying the relevant percentage to a set annual figure known as the car fuel multiplier.
To illustrate this, where an employer provides fuel in respect of a petrol company car with CO2 emissions of 117g/km, and the car is available throughout the 2019/20 tax year, the car fuel benefit arising for 2019/20 would be £6,507 (ie the car fuel multiplier of £24,100 x the relevant percentage of 27 per cent). If the employee concerned is a marginal higher rate tax payer, they would tax of £2602.80 (ie £6,507 x 40 per cent) on the car fuel benefit during the tax year. The employer would pay employer’s Class 1A NIC totalling £897.97 (ie £6,507 x 13.8 per cent) on the car fuel benefit during the tax year. The car fuel benefit would also be reportable on the employer’s 2019/20 P11D and P11D(b) submission.
How can the car fuel benefit be reduced to nil?
The car fuel benefit is reduced to nil in a tax year if it can be shown that either Condition A or Condition B below apply.
Condition A is met in the tax year if the employee or director is required to make good to the person providing the fuel the whole of the expense incurred by that person in connection with the provision of fuel for the employee’s private motoring and the employee does make good that cost by 6 July following the end of the tax year concerned.
Condition B is met in a tax year if the fuel is made available only for business travel.
It is quite common, therefore, for employers to enter into arrangements with employees who are provided with a company car, whereby they are provided with fuel for all journeys and required to reimburse the cost of the fuel attributable to their private motoring or are only provided with fuel for business journeys.
The arrangement the employer enters with the employees will normally depend on how the car is used by employees. For example, where the workforce provided with cars primarily use those cars for business journeys, it might be more sensible for the employer to meet the upfront cost of all fuel and then require the employee to reimburse the cost of the private mileage. If, on the other hand, the company car is primarily a perk and very little business mileage is undertaken, it might be more sensible for the employer to pay the fuel for business journeys only.
The HMRC advisory fuel rates (which are reviewed by HMRC quarterly) can be used by employers when either fuel for business mileage is paid to employees, or fuel for private mileage is reimbursed by employees. For example, if the employee reimburses the cost of fuel attributable to all private mileage, at or above the HMRC fuel advisory rate relevant to that car (the rates depend on the fuel type and engine size of the car), HMRC should (subject to the points highlighted below) accept that the cost of fuel attributable to private mileage has been repaid by the employee.
It is worth noting here that the rules about whether a journey is a business or private journey can be complex, especially where the employee is travelling between their home and a workplace. This was considered in our previous article ‘Travel and subsistence: do you understand the rules?’ and was also recently considered in the tax tribunal case of Paul Nowak v HMRC (which confirmed that tax relief cannot be given on travel expenses which relate to ordinary commuting).
Will HMRC check records?
Where fuel is provided in respect of a company car, but no car fuel benefit is reported because Condition A or Condition B are applied, HMRC will expect the employer’s documentation and procedures relating to fuel for company cars to support the fact that no car fuel benefit arises.
We regularly see HMRC take a hard line when checking this. They will expect to see evidence of robust records and procedures confirming that either Condition A or Condition B are met.
For example, in respect of satisfying Condition A, HMRC will normally expect to see:
- the employer’s policy on fuel being documented in an expenses policy or similar;
- evidence of employees being required to reimburse the cost of fuel relating to private mileage;
- the full cost of fuel relating to private motoring being repaid to the employer by 6 July following each tax year; and
- detailed mileage records to substantiate the amounts repaid.
Regarding mileage records, in a recent case we have dealt with, HMRC have expected to see a monthly record for each employee showing the total mileage for their car at the beginning of the month, details of all business journeys undertaken during the month (showing the date of each journey, the purpose, and where the journey began and ended), and the total mileage at the end of the month. The difference between the total mileage in the month, and the business mileage in the month, then representing the employee’s private mileage.
The keeping of robust records is crucial. In a situation where an employer has applied Condition A or Condition B but cannot provide supporting evidence that it is satisfied, there is a risk of HMRC taking the view that each of the employees concerned is in receipt of a chargeable car fuel benefit, which is liable to tax and Class 1A NIC. In such circumstances HMRC would initially seek recovery of the underpaid tax due on the unreported car fuel benefits from the employer. The tax would then be calculated on a grossed-up basis and if the employer has not exercised reasonable care, HMRC would be able go back six tax years to recover the underpaid tax due, together with the underpaid Class 1A NIC, interest charges, and a penalty. An absence of adequate records can therefore expose the employer to significant liabilities.
What should employers do to reduce risks?
Employers meeting the cost of fuel in respect of company cars and who are applying Condition A or Condition B should:
- ensure that they understand the rules about business and private travel (especially where employees are claiming business mileage in respect of journeys between their homes and workplaces);
- check that its policy on the payment of fuel for company cars (including guidance on what constitutes business and private travel) is properly recorded in employee policy documents and similar;
- ensure that procedures are appropriate, including ensuring that employees provide detailed information about their mileage; and
- seek specialist tax advice if there is in any doubt about how the rules apply.
How can RSM support you?
We can assist in several ways, for example by helping you to:
- understand the rules as they apply to your workforce, identifying any issues that might be likely to arise, or weaknesses in your procedures, so that you can fix potential problems before HMRC visit;
- set up your expenses systems, draft or make change your expenses policy, and provide access to technology to help ensure that your expenses policy is being read by your employees; and
- update your processes to help you optimise compliance while minimising the administrative burden.