The financial implications of providing free fuel for staff

MOST of my company car drivers receive free private fuel. It seems very unfair to encourage them to give up this benefit when fuel prices are so uncertain. What do you recommend?

David Rawlings, car tax and SME specialist at BCF Wessex, provides the answer on how to organise a small fleet more effectively.

I totally agree that uncertain fuel prices are a cause for concern. I can understand why some of your employees may think holding onto the benefit is a wise move, but what about your position as an employer?

Let’s assume that one of your employees drives a fairly standard diesel powered company car with CO₂ emissions of 122 g/km, and fuel consumption of 50mpg.

The driver thinks he should keep the benefit of private fuel because he drives about 1,000 private miles a month. His fuel benefit charge will be £1,354 (18,800 x 18% x 40%). This represents a saving of £173 compared to buying the fuel himself, which would cost £1,527, assuming a cost of fuel per litre of £1.40.

However, what does it cost you to provide the fuel?

Annual cost of fuel £1,527 Less VAT recovered £255 Plus VAT scale charge £158 Class 1A NIC on benefit £467 Total £1,897

Less

Corporation tax (20%) £379 Total cost of providing fuel £1,517

That’s quite an expensive benefit to provide and together you’re currently paying £3,045, which is equivalent to £2.79 a litre!

In summary it seems you and your employees need to seriously re-consider the overall position. In a climate of increasing fuel prices drivers will always want to retain the benefit as they would wish to hedge the future cost to themselves. But from the company’s perspective, as free private fuel is heavily taxed this is not the optimum financial solution; as prices rise the company’s costs will increase by more than the amount by which the employees’ benefit. A negotiated buy-out should benefit employees and the company.

All figures are based on tax year 2011/12; corporation tax based on Small Profits Rate of 20% – previously Small Companies’ Rate.

Also read this
Tax: why ‘free’ fuel isn’t free – the company car fuel benefit charge.