The tax rules relating to fuel used in company cars are tricky and small errors can add thousands to your taxable income. How can you avoid falling foul of them?
Company cars and fuel
Company cars need fuel. The trouble is if an employer pays for even £1 of fuel for an employee’s private travel the full taxable benefit applies. This results in a hefty tax bill for the employee and a Class 1A NI charge for the employer.
Tip. Where the employer pays for fuel, the tax and NI charges can be avoided by the employee reimbursing the cost of any fuel they use for private journeys. The employer must have a policy which requires employees to make the reimbursement. A corollary of this is that the employee knows how many private miles they travel so they can work out what to reimburse. This is where Contract Services (Millenium) Limited (CSM) came unstuck.
P11D failure
Following a compliance check of CSM’s records HMRC considered that the company should have reported car fuel benefit for several employees on Form P11D for more than one year. The Class 1A NI bill for this was more than £5,500 on top of which HMRC hit the firm with penalties of nearly £1,000. CSM disputed the NI assessment and appealed to the First-tier Tribunal (FTT).
Agreement
CSM argued that it had taken the appropriate steps to prevent the car fuel benefit charge from applying. It had agreements with its employees requiring that they each reimburse the company for the cost of fuel it paid for in respect of private travel.
Insufficient evidence
The FTT accepted this but CSM had failed to provide HMRC with adequate records to show that the amounts reimbursed accurately represented the cost of fuel for private mileage. HMRC could not be sure that such fuel costs had been paid for by their employees rather than the employer. Therefore, the NI charge and penalties stood.
Record keeping
The CSM case demonstrates that HMRC is prepared to attack employers which don’t ensure that their employees keep records of private journeys needed for accurately working out the amount to reimburse.
Tip. Your policy for employees with company cars should say that detailed mileage logs must be kept and a copy provided to you, say, every month. There are many mileage tracking apps your employees can use to help with this.
Tip. To prevent car fuel benefit from applying, your firm’s company car policy should say that employees must reimburse you for any private mileage fuel no later than 6 July following the end of each tax year. The deadline for reimbursement is the 6 July following the end of each tax year.
Tip. Instead of having to rely on your employees keeping logs of private mileage, you can get them to pay for all the fuel they put into their company cars; they then submit an expenses claim for the fuel used for business mileage. They will still need to keep mileage logs but there’s less risk of you falling foul of the car fuel benefit charge .
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.