ways2work > News > January 2010
Employees and business pay the price for 'free' fuel - Energy Saving Trust Report
Friday 1 January 2010
Energy Saving Trust monthly transport e-newsletter issue 26 reports:
Employees and business pay the price for 'free' fuel
Thousands of company car drivers across the UK continue to receive company funded fuel for private use. But almost all would be better off - and so would their employer - if they gave up the 'benefit'. For the handful of employees who will lose out, a compensation package could be agreed.
Ironically known as 'free' fuel, for the majority of company car drivers and businesses it is in fact the most expensive petrol and diesel they will buy and financial experts advise the wholesale withdrawal of the 'perk'. Cost-conscious employers should consider whether to fund employees to travel a high number of miles in their own time at the companies' expense.
Given that corporate social responsibility and an improved environmental policy is a key issue for many organisations - the continuation of 'free' fuel is not only costly for business, but also creates an incentive for staff to drive.
Tax policy aims to drive out 'free' fuel
The Government, since the late 1990s, has gradually increased the scale charge paid by employees who receive 'free' fuel for private use from their employers.
More than a decade after the tax increases started to bite, HM Revenue and Customs says that as many as 380,000 employees still pay tax on company-funded fuel for private use. However most employees would be better off giving up the 'perk' and paying for fuel used privately themselves.
In April 2003 the 'free' fuel tax system was changed to one based on a company car's carbon dioxide emissions (the same percentage figure used to calculate the car benefit charge) multiplied by a set figure for the tax year. Until April 6, 2008 that set figure was £14,400, but has now been increased to £16,900. For many people, the tax on their private fuel will be greater than the tax they pay on their company car.
The Government has announced that from April 6, 2009, the multiplier will increase at least by the rate of inflation each financial year. This tax strategy is designed to encourage drivers to give up the 'benefit' and travel fewer miles by paying for petrol and diesel themselves - while simultaneously supporting the Government's emissions-based motoring fiscal strategy.
CASE STUDY
| Calculating the tax burden - the driver's perspective |
Bill is a 40% taxpayer who has a five-door Ford Focus 2.0 Zetec as a company car. The model returns 40 mpg on the combined fuel cycle, emits 169 g/km (21%) and Bill travels 10,000 private miles a year.
In 2008/9 Bill will pay £1,419.60 in tax for continuing to be in receipt of 'free' fuel (£16,900 x 21% = £3,549 x by 40%).
If Bill travels 10,000 miles a year, he will use 250 gallons of petrol. With petrol costing an average 89.5p a litre (£4.07 a gallon), according to the AA, it would cost him £1,017.50 a year at the pumps if he paid for the fuel out of his own pocket - a saving of £402.10 (private miles driven multiplied by the price per gallon and divided by MPG).
Bill's managing director Sue drives a BMW 540i SE saloon, which emits 250 g/km of CO2 (35%) and returns 27 MPG.
For continuing to receive 'free' fuel Sue will have a tax bill of £2,366 in 2008/9. However, as she also travels 10,000 private miles a year, it would cost her £1,505.90 to buy the 370 gallons of fuel to travel that distance if she paid for the fuel herself. As a result, Sue would save £860.10 if she elected to give up the 'perk' and pay for fuel out of her own pocket.
The breakeven point for annual mileage arises when the tax on the fuel benefit equals the cost of the fuel (tax on the fuel benefit multiplied by MPG and divided by the price per gallon). In the case of Bill he would have to travel 13,951 miles to breakeven if continuing to receive 'free' fuel, while Sue would have to travel 15,696 miles.
The current rules allow employees to opt out of 'free' fuel part way through the year and to calculate the liability pro-rata. But drivers opting back into a 'free' fuel scheme during the same tax year will be subject to tax on the full tax liability for the year.
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| Calculating the tax burden - the company's perspective |
| Just as drivers' should calculate whether they would be better off giving up 'free' fuel, so companies should also work out the cost to them of continuing to provide the 'benefit'.
In the case of Bill the calculation is:
Cost of fuel £1,017.50
VAT recovery on fuel at 17.5% (£151.54)
VAT fuel scale charge £172.77
Class 1A NIC on fuel scale charge £454.27
Total £1,493.00
Corporation tax relief at 28% (£418.04)
Net cost to company of providing 'free' fuel £1,074.96
As the figures show, the cost to the company of providing 'free' fuel to Bill is £57.46 more than the value of the fuel. The same calculation for Sue would result in the cost to the company of providing 'free' fuel being £1,675.19 - almost £170 more than the price of the fuel at the pumps.
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Compensating employees
In both examples, Bill and Sue would be better off with 'free' fuel being withdrawn, as it is no longer a benefit to them.
However, if the calculations reveal that employees would be better of retaining the 'benefit', the company may decide that the cost to the company of the 'perk' is too high.
Equally, the idea of funding employees to travel privately may be counterproductive to the business's desire to meet CSR targets. Fuel that is paid for by an organisation, even if it is used privately, is counted as part of that organisation's carbon footprint. A compensation package could be calculated which benefits the company, the individual and the environment.
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