Ray Chidell of Mazars Neville Russell provides TaxZone readers with the latest in his series of bulletins on employer-related tax issues. Ray is author of the P11D Handbook and offers employers a free, regular e-mailed tax advice bulletin, Employer Tax Update (ETU).

To get on the mailing list for his free bulletins, simply send an e-mail note of your name and company to ETU@mazars-nr.co.uk

Company Car Fuel?
The question of whether the fuel scale charge arises in respect of a company car is likely to be considered during any PAYE audit by the Inland Revenue. It is very easy for the tax charge to be incurred inadvertently.

Fuel for private mileage
To avoid the tax charge, it is necessary to demonstrate that the employer has not borne the cost of fuel for any private driving in the year. Normally the mechanism to achieve this will be that the employee pays for all fuel and then claims reimbursement for business journeys only. Alternatively, the employer may initially pay for all car fuel but then seek reimbursement from the employee for the cost of all private fuel. This latter route, whilst acceptable in principle, is probably more dangerous in practice.

Other employers pay a round sum fuel allowance to their company car drivers. This policy potentially causes difficulty if the driver does not expect to incur the fuel scale charge. If the cost of business mileage is less than the round sum allowance then there is clearly an element of subsidising private mileage. Even if it is the other way round, the full fuel scale charge may still be incurred. This is because the legislation (s 158(6) ICTA 1988) only removes the fuel tax charge where the employee is required to make good the cost of private fuel. There are possible counter-arguments but the scenario is best avoided.

Is it business mileage?
In either case, the danger is that some of the journeys for which the employer is bearing the cost will not actually qualify as business mileage for tax purposes. Suppose, for example, that an employer is having an office reorganisation over a weekend. Certain staff have volunteered to help out and, as the employer does not want them to be out of pocket, he tells them to claim the one-off journey of home to work and back for the weekend through their normal expenses claims procedures. Despite the exceptional circumstances, the journey from home to the office remains private travel. As such, this arrangement could incur the full tax charge in respect of car fuel for the year.

Is reimbursement by the employee tax-effective?
Sometimes, reimbursement by an employee of the cost of private mileage may not achieve the desired result.

Take as an example the driver of a 1,600cc petrol car. Assume that she covers 2,000 business miles and 10,000 private miles in the year. Suppose that all her fuel is provided by her employer at a cost of £1,200 for the year. Assume that she is required to contribute 8p per private mile “as a contribution towards the cost of private fuel”.

In this example, the actual cost of fuel is 10p per mile. As her contribution does not make good the full cost of private fuel, she will still be taxed on the full scale charge of £2,170. The £800 that she has contributed will not reduce the fuel benefit. Furthermore, the Revenue may well be able to argue that it does not meet the conditions for reducing the car benefit either, though a little care in the wording of the Agreement with the employee should ensure that tax relief is available against the car benefit.

Other pitfalls
The Revenue’s view is that any requirement for the employee to reimburse the cost of private fuel must be in place before the fuel is provided. The employee should ideally reimburse the private element within the tax year but, in any case, it should be within a short period after the end of the tax year (Revenue Schedule E manual para SE23774).

Is it really necessary to avoid the fuel scale charge anyway?
For some individuals, of course, it is still better to pay tax on the scale charge than to pay for the private fuel. The huge increases in the tax liabilities on the fuel scale charges have, however, outstripped even the rising cost of fuel itself. Whatever the engine size of the car, the taxable benefit more than doubled in the three years from 1997/98 to 2000/01.

Obviously, the employee’s perspective is simply whether he pays more for fuel or more in tax. This in itself should be easy to calculate. The position is slightly more involved if it is assumed that the employee will receive additional salary equivalent to the saving to the employer if the latter no longer pays for private fuel.

Example
Suppose that an individual, paying tax at 40%, drives a 1950cc company car. If the employer pays for private fuel, the scale charge on which the employee will pay tax is £2,170.

Suppose that the cost of fuel used privately amounts to £1,800 (high private mileage). Clearly, if the employee is simply given the choice of paying for his own petrol or having it paid for by his employer, he will choose to have it paid for. As such he will pay tax of £868 (£2,170 at 40%) instead of paying for fuel of £1,800, a saving of £932. However, if the employer is willing to pay additional salary in lieu of paying the petrol cost then the position could be seen as follows:

Employer’s perspective (to remain neutral, subject to VAT – see note)

• employer saves fuel cost of £1,800;
• therefore employer pays additional salary of £1,800;
• employer saves NIC of 12.2% on £370 (=£45) (ie paying NIC on salary of £1,800 instead of on scale charge of £2,170);
• therefore employer pays additional £40 (net of employer NIC on this additional amount).

Employee’s perspective
Additional salary (as above) £1,840
Tax on additional salary £(736)
Cost of fuel borne privately £(1,800)
Tax saving on fuel charge (£2,170 @ 40%) £868

Net saving by paying for own fuel £ 172

Even in this case of very high private mileage, the employee is better off paying for his fuel privately rather than bearing the tax cost, but only if the employer is willing to pay cash in lieu of the private fuel cost.

Note
If the employer is VAT registered, there will be VAT considerations as well. In the example given, the employer will be saving the VAT scale charge of £193.61 but will no longer be able to reclaim VAT on the fuel, costing him £268.08. As such he will be worse off by some £75.

See Ray’s previous bulletins on the Pre-Budget Report, employee medical expenses, the choice between van or car, payments in lieu of notice, employee clothing, employee contributions to company cars, tax-free benefits, FPCS, employment status, P11Ds, PAYE Settlement Agreements, Class 1A National Insurance, Company car issues, loans to employees, Christmas parties, and Employed or Self-Employed.