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• Employer
• Employees
• Companies Need HelpBackground
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According to the latest Inland
Revenue statistics there are approximately 1.6 million company car drivers
in the UK. Of these, 850,000 (i.e. 53 per cent) also receive private fuel
benefit or 'free fuel'. A staggering statistic considering the Chancellor
of the Exchequer has increased fuel scale charges by up to 346.8% since 1997.
The effect of these increases is that the tax cost of the fuel benefit to
the employee is now greater than the cost of the fuel provided, in all but
the most extreme cases.
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Employers and employees alike may not have monitored their employee benefits on a regular basis, consequently many
employees in companies that receive 'free fuel' are losing out by doing so.
Amongst other considerations, recent taxation changes (and future changes) in
the UK have meant that all companies need to look at their private fuel
schemes to ensure that they are cost effective, both for the employee and the
employer.
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| Every employer should consider conducting a review of all employees' private fuel schemes immediately, identifying current winners and losers. The employer should then consider
a voluntary opt-out for losers, who would be better off without 'free fuel'. In addition they could offer to buy out winners under the current scheme using resultant administrative savings, VAT recovery on fuel, VAT fuel scale charge, Class 1A NIC and tax relief. These annual costs will increasingly produce a net saving to the employer so the sooner it is effected the better. Over four years, on even a modest fleet of cars, the savings could be enormous. Top Of Page |
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Employer
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There are five key changes in the
'free fuel' area affecting employers that were introduced from 6 April 2003:
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• The Government have changed the
rules on the taxation of 'free fuel' for private mileage. The previous system
was based on engine size, but from 6 April 2003 drivers began to pay tax on a set
value of the benefit according to their vehicle's CO2 emissions, using the bands
introduced for company car tax. The Government has set a nominal value for
the perk - £14,400 in the present tax year. For example, the driver of a car producing
CO2 at 215g/km will pay tax on 29% of the benefit charge of £14,400, i.e. 29%
x £14,400 x 40% = £1,670.40.
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• The tax bands of the carbon
dioxide-based company car tax have changed, pushing up bills for drivers in
all but the environmentally-cleanest cars. Company car users pay tax on a percentage of the
value of their cars, defined by how much CO2 their vehicles produce - ranging
between 15% and 35%. Last year, the starting band for the tax was 15% for
petrol cars producing 155g/km and it rose by 1% for every 5g/km increase in
CO2 to 255g/km/35%. This year, the starting point for the tax moves down to
145g/km. As a result, an 'average' fleet car with emissions of 200g/km
incurred a charge tax of 24% during 2003/04 and this increases to 26% this year.
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• If an employee ceases to be provided 'free fuel' during a tax year, the employer will only have to pay the annual Class 1A NIC charge for the period when it was in force. However, returning to 'free fuel' again within the same tax year will prevent any such apportionment.
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• Unleaded and diesel prices
continue to rise.
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| • Increase in costs for employee communication
and ongoing administration associated with these changes. Top Of Page |
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Employees
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• A new fuel benefit charge came into effect from tax year 2003/04. The charge replaces the old 'fuel
scale' charge and applies to employees who have a company car and are provided
with 'free fuel' for private use. Although the conditions are the same as for the old fuel
scale charge, the change is in how the benefit is measured. It is now linked directly to the CO2 emissions of
the company car - the same as the company car benefit charge. The same percentage figure is used for both purposes.
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• Where 'free fuel' ceases to be
provided to an employee during the tax year, they will be entitled to pay
only the proportion of the full annual tax charge related to the part of the
year until 'free fuel' stopped. Class 1A NICs due will be proportionally
reduced to the same extent. However, receiving 'free fuel' again later in the
same tax year will prevent any apportionment for this reason.
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| The overall result of these changes
is to further diminish the 'benefit' of 'free fuel' for the majority of company
car drivers, thereby reducing its attractiveness. In the light of these
taxation increases all companies need to re-evaluate the provision of free
fuel to their drivers. This review is a complicated
process, as no two employees are identical. The employee permutations of tax
rate, private mileage, fuel type, fuel cost, fuel consumption, CO2 emissions
or engine size, and driving style combine with employer permutations of VAT
and Corporation Tax implications, to form a complex computation that is
sensitive to small changes. Top Of Page |
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Companies need help!
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This website will provide
you with: -
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• Detailed calculations of the
costs/savings for both the company and employees.
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• Individual employee and company
reports that explain to affected drivers why their 'free fuel' provision is
being stopped.
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| Such are the changes that we feel it is
important to look at the private fuel benefit schemes currently in place
from both the employee and employer perspectives. Top Of Page
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