15 September 2022
Reimbursing employees for petrol used for business trips.
With petrol prices at record highs HMRC’s published advisory fuel rates (AFR) are
proving insufficient to cover fuel costs incurred by employees being reimbursed for
company car business travel.
HMRC guidance notes that ‘if the cost of business travel is higher than the
guideline rates, you can use your own rates to reflect your situation’. It follows that if
the business can evidence a higher actual cost of company car business travel, it can
reimburse actual costs to an employee without employers’ tax/NIC consequences.
Short of an employee filling up their petrol tank at the start and end of any
business journey to calculate actual cost, are there any less onerous methods of
Do Taxation readers have any thoughts on whether using the methodology in
HMRC’s published rates, but applying actual petrol pump costs with a receipt as
evidence and calculating a new rate per mile, would be acceptable? For example:
say an employee has a company car with a 1401 to 2000cc engine, and can prove to
have paid 190.0p/litre for fuel (863.7p per gallon). Applying HMRC’s ‘applied’ MPG
published data, the rate per mile is 19.2p. That would be rounded to 19p per mile.
Query 19,980 – Anon.
The driver is subsidising the employer.
We have seen several occasions where drivers complain that the HMRC AFR rates are simply not high enough to pay for the fuel used for business journeys meaning that the driver is subsidising the employer for each mile travelled.
This is not surprising. The figures for June 2022 would have been computed using, at best, the mid May 2022 fuel prices. The AFR figures cannot reflect the subsequent rises in fuel prices and
are potentially three months out of date.
Mileage per gallon (MPG) figures used in the calculation of AFR by HMRC are also prone to error. They are based on manufacturers’ information and there is an arbitrary adjustment of 15% to try to get to a real-world MPG if the manufacturer states they used the new
European driving cycle test.
The alternative for the employer is to pay for business mileage at an actual cost of pence per mile (ppm) rather than use the AFR. The words used by HMRC are ‘if the cost of business travel are higher, ... you can use your own rates.’
It is not enough to show that someone bought petrol for 190p/litre (as opposed to HMRC’s figure of 165.1p/litre) as there is usually a disconnect between the spend and any specific journey and HMRC would argue that the actual cost to the employer has not been calculated.
For example, there may already have been fuel in the tank purchased previously and the 190p/litre may not match a specific journey. Additionally, the MPG of the car in question may not match the assumptions used by HMRC.
There is a simpler way to prove actual cost. This is to have data for each company car in a fleet over the course of a year as to total mileage and total fuel spend. To avoid administrative
complexity, the simplest way is often to provide a fuel card and a mileage system which allows the business mileage to be recorded separately. The true cost of each car’s ppm is obtained by simply dividing the total cost by total mileage. Using a period such as a year gives the
ppm calculation more validity (smoothing out some months when the car may be fuelled more than average for example).
Once the driver has a company fuel card, they are by definition being reimbursed for the actual cost of business mileage. However, no one wants to have to pay the benefit in kind on the fuel card, so it is vital that the driver is required to make good the cost of private mileage. This can be done using the new data now available of the true ppm, or HMRC permits the use of the artificially low AFR if preferred. This is especially helpful for hybrid cars where there is often a large difference between the AFR and actual ppm.
There are some tax and VAT pitfalls to avoid but this technique is being used by many drivers around the country already. – Peter Moroz
Comprehensive records should be kept if non-standard rates are used.
As Anon says, HMRC does allow a higher mileage rate to be paid ‘if the cost of business travel is higher than the guideline rates, you can use your own rates to reflect your situation’. However, the next sentence in the guidance (tinyurl.com/yjsz7cjn) says: ‘[I]f you pay rates that are higher than the advisory rates but cannot show the fuel cost per mile is higher, there will be no fuel benefit charge if the mileage payments are only for business travel. Instead, you’ll have to treat any excess as taxable profit and as earnings for class 1 National Insurance purposes.’ Thus the
result is that the excess will be treated as normal salary under PAYE.
HMRC now publishes the reasoning behind its calculation of the advisory fuel allowance for company cars (tinyurl. com/4s4spanx): ‘The mean miles per gallon (MPG) is taken from manufacturers’ information, taking into account annual sales to businesses (fleet audits average 2018 to 2020). Where the:
● manufacturer’s MPG figure was produced using the new European driving cycle (NEDC) test, it is adjusted down by 15% to take account of real driving conditions;
● MPG figure is produced from the worldwide harmonised light vehicle test procedure (WLTP) test, introduced in 2018, no adjustment is made.’
HMRC’s figure of 165p/litre is much lower than present rates so Anon could prepare a calculation based on today’s rates. I would ensure that the employees’ mileage records are comprehensive. If HMRC was to successfully contest the higher rate then additional tax and NI
would arise. Depending on the number of employees and the period of time involved this liability could be high. If the company is not under pressure from employees to increase the rate, Anon could take the line that the rates are reviewed every three months so the delay
in uprating the amounts payable may not be critical. – The Wolfman.
Article from Taxation Magazine 4 August 2022