By Claire West
The advisory fuel rates (guidelines on fuel only mileage rates for company cars) were first published in January 2002. It has been possible to use them since then to negotiate dispensations for mileage payments for business travel in company cars.
They are intended to reflect actual average fuel costs at the time they are set. The aim is to save time for both employers and HMRC by setting out some figures that can be used in the majority of cases. They give employers more certainty about what the mileage rates that they choose to apply mean for tax and National Insurance contributions (NICs).
The rates only apply where employers:
• reimburse employees for business travel in their company cars, or
• require employees to repay the cost of fuel used for private travel.
The rates do not apply in any other circumstances. In particular, employees driving company cars are not entitled to use them to calculate a deduction if employers reimburse them at lower rates. Such calculations should continue to be based on actual costs incurred.
Employers reimbursing employees for the cost of fuel used for business travel
If the rate paid per mile of business travel is no higher than the advisory rate for the particular engine size and fuel type of the car, HMRC will accept that there is no taxable profit and no Class 1 NICs liability. This reflects the fact that they are intended to reflect actual average fuel costs.
We are not suggesting that employers should always use these rates for reimbursing employees for business travel in company cars. The advisory rates represent average fuel costs, and employers may wish to set rates which better reflect their particular circumstances. For example, where the cars in the fleet are fuel efficient, employers may prefer to reimburse at lower rates than those outlined here.
The advisory rates will not be binding where an employer can demonstrate that the cost of business travel in company cars in the fleet concerned is higher than the guideline mileage rates – perhaps where employees need to use particular types of car such as 4x4s to cover rough terrain.
If an employer pays mileage rates that are higher than the advisory rates but is unable to demonstrate that the fuel cost per mile is indeed higher, there is no fuel benefit charge if the mileage payments are made solely for miles of business travel. Instead, any excess will be treated as a taxable profit and as earnings for Class 1 NICs purposes. The employee can obtain relief for any actual expenses which have not been reimbursed.
Employers who require employees to repay the cost of fuel used for private travel
Providing that all of the miles of private travel have been properly identified, HMRC will accept that there is no fuel benefit charge, and therefore no Class 1A NICs liability, where the employer uses the appropriate rate from the current table (or any higher rate) to work out the cost of fuel used for private travel that the employee must repay to the employer. Again, this reflects the fact that they are intended to reflect actual average fuel costs.
Even if it seems that the actual cost of the fuel could be more than the current advisory fuel rate, it is only in exceptional cases that we will consider arguing that a higher repayment rate should apply. For example, where the employee drives a very large-engined company car that achieves fewer than 16 or 17 miles to the gallon. But we will always accept that the guideline rates can be used to calculate the amount that the employee must make good where the engine size is 3 litres or less.
The advisory rates will not be binding where an employer can demonstrate that employees cover the full cost of private fuel by repaying at a lower rate per mile.
Dispensations not drawn in terms of the advisory fuel rates
Many dispensations contain rates at which employers are entitled to reimburse employees for fuel which the employee has purchased for business mileage in a company car (including a pool car) without any tax or NICs implications. Some of these dispensations quote specified rates per mile, others refer to the advisory fuel rates.
From 1 July 2005, HMRC interprets all such dispensations (but not any in relation to vans, to which the advisory fuel rates do not apply) as though they referred to the advisory fuel rates unless the specified rate is higher. We will not issue revised dispensations, nor will employers need to apply for one, in order for this change to take effect. Either side can, of course, review other aspects of existing dispensations in the normal way.
This does not mean that employers must pay higher rates than their own policies require. It simply allows dispensed rates to be varied centrally, relieving both sides of the administrative burden of regular updates for this single purpose.