Is your company paying the price by offering staff 'free' fuel?

Employer-provided petrol and diesel for private use may appear a flaw-free benefit to drivers, but it can be costly to both parties, finds John Charles

Almost a quarter of company car drivers continue to use fuel paid for by their company in private use. But it is certain that virtually all would save money by giving up the ‘perk’.

For most employees, so-called ‘free’ fuel will be the most expensive fuel they ever buy. In many cases, they would save cash if they paid for diesel or petrol used privately at the pumps or reimbursed by their employers at forecourt prices.

What’s more, the provision of fuel for private use is likely to be a significant cost to employers as well as encouraging staff to drive more miles, driving up the employer’s carbon footprint in an era of an ever-increasing focus on corporate social responsibility.

Tax experts agree that there will be very few circumstances where both the employee and employer will be financially better off by retaining ‘free’ fuel.

“I find it bizarre that employees are continuing to be in receipt of ‘free’ fuel,” says Alastair Kendrick, tax director at chartered accountants MacIntyre Hudson. “But all attempts at advice are ignored. Employees view it as convenient. Those still in receipt of the benefit seem oblivious to the reality of the tax position relative to the number of private miles they drive.

“I have done calculations for individual employees and proved to them they would be better off paying for fuel out of their own pocket, but they do nothing about it.”

Meanwhile, from the corporate perspective, Kendrick highlights the fact that businesses continuing to offer the ‘benefit’ are “inciting their employees to drive more miles”, thus maintaining an approach that is counterproductive to their environmental agenda.

What’s more, with pump price volatility, the higher the price of fuel, the more advantageous the tax position of drivers, but the higher the cost for employers.

David Rawlings, director of BCF Wessex Consultants and a former automotive tax expert at Deloitte, adds: “I cannot understand why employees and employers cannot get their heads around this issue – that in most cases it is costing both a lot of money.”

However, he adds: “There will always be a position where an employee’s cost of fuel is more than their tax bill so they will be better off retaining the benefit. But, their employer will be worse off.

“There are very few circumstances where both the employee and employer will be financially better off by retaining the benefit.”

John Pryor, chairman of fleet operators’ association ACFO, says: “For the vast majority of employees – perhaps 90% or more – the tax paid outweighs the value of the benefit.

“For a few employees who have very high private mileage it may work out as a cost-effective perk. The issue then is: should their employer be paying?”

Pryor also points out that there could be a ‘creeping’ move by drivers of ultra-low emission vehicles, such as plug-in vehicles, to look to benefit from the ‘perk’ – the only likely winners – in addition to those employees clocking up high private mileage.

The lower benefit-in-kind (BIK) tax rate paid by such drivers – 5% on cars with CO2 emissions of 50g/km or less in 2015/16 and 9% on cars with CO2 emissions of 51-75 g/km – could make it tax efficient for drivers to opt for the ‘benefit’ if it remains available from their employer.

Pryor adds: “It is an unintended consequence of the tax regime that employees may calculate that they are better off with company paid-for private fuel, as they will have to travel significantly less mileage to break even.”

HM Revenue and Customs’ (HMRC) provisional data for 2012/13, the most recent available, highlights that of 940,000 BIK tax paying company car drivers, 220,000 (or 23%) were in receipt of ‘free’ fuel.

That compares with, for example, 2004/05 when there were 1.2 million company car drivers of which 410,000 (or 34%) paid tax on ‘free’ fuel.

Since the late 1990s, the Government has increased the company car fuel benefit charge multiplier annually, and in 2015/16 it is £22,100.

Yet, despite the tax increases designed to remove the ‘benefit’ which the Government perceives as impacting on its environmental agenda by encouraging journeys, tax experts speak of a ‘hardcore’ element of drivers for whom the ‘perk’ is untouchable.

HMRC says the number of company car drivers continuing to pay tax on ‘free’ fuel has reduced year-on-year for a number of reasons, notably the increasing tax charge, but also due to the overall trend of rising fuel prices.

That, says the tax authority, has caused employers and employees to look more carefully at whether the fuel benefit formula results in a tax charge commensurate with the true value of the benefit.

Rawlings believes the withdrawal of the provision of company provided fuel is a “psychological issue” for many drivers and businesses and he lists a variety of excuses given for its retention. They include:
■ Employers not wishing to withdraw a perceived ‘benefit’ from staff.
■ Employees having a long-distance commute.
■ Staff and their employers not understanding the issue and having difficulty in making the cost or ‘benefit’ calculation.
■ The convenience of paying for fuel with no requirement for an expense claim or reimbursement regime.

“None of the excuses are valid,” he says. “In most cases there is no benefit to either party and certainly not to employers. I believe most major employers have got to grips with the issue. However, I think there are many SMEs with a handful of employees in each whose benefits include a fully-expensed company car. These people simply don’t understand the issue and they are not being advised to take action.”

Communication key to abolishing ‘free’ fuel

Withdrawing a ‘free’ benefit is highly counter-intuitive so clear communication and an accurate picture of each employee’s mileage and fuel costs are critical, say experts.

Describing ‘free’ fuel as an “archaic benefit that’s often very costly to both sides”, Paul Jackson, managing director of mileage expense  management specialist The Miles Consultancy (TMC), says employers should build up an accurate analysis of every driver’s business, commuting and private mileage, and their fuel pence-per-mile costs.

“The data will show that many drivers will be better off simply by giving up the benefit,” he says.

“Others will need a measure of compensation to begin with.

“Telling people they’ll be better off  by giving up something that’s ‘free’ is highly counter-intuitive, so clear communication is vital.”

As an example, he says, one TMC client operating a 120-strong car fleet produced dummy payslips to show each driver would be better off after  withdrawal of the ‘benefit’.

The first-year cost saving for the company from withdrawing ‘free’ fuel ran to six figures.

Chris Chandler, principal consultant, fleet consultancy at Lex Autolease, adds: “A lack of knowledge around more cost-effective alternatives may be making some employers wary to change from employer-provided fuel.

“There may also be reluctance to face a potential backlash from employees who believe employer-provided fuel gives them cost  savings and protection from fuel  price increases.

“But typically just demonstrating to employees the effective ‘non-benefit’ of fully expensed fuel and the costs involved will make many give up the benefit voluntarily.”

Companies that had bought-out the ‘perk’ almost inevitably found there were winners and losers, says David Rawlings, of BCF Wessex Consultants.

As a result, the amount of  compensation paid to some employees – those whose tax bill is lower than the cost of the fuel used privately – could be significantly more than to others if done on a case-by-case basis.

In what might be perceived as a hotbed for confrontation, Rawlings advises companies to be more subtle and forceful and recommends a  “flat-fee buyout”.

Case study: Mears Group

Gloucester-based Mears Group, the social housing repairs and maintenance provider, withdrew its ‘free fuel perk’  to all 180 eligible employees eight years ago.

Jo Hammonds, the company’s  group asset manager with fleet responsibility, says analysis resulted  in the company compensating  between 20 and 30 employees on  an individual basis.

“We compensated some employees for the withdrawal of the benefit,”  he says. “But that payment was far outweighed by the cost of continuing the policy in terms of tax paid by employees and the cost to the  business. The vast majority of employees were immediately  financially better off. A handful of employees didn’t realise they would be better off, but when we undertook the calculations and proved it to them they accepted the change.

“Ending a perceived benefit can be a thorny issue so it is essential  to communicate clearly with employees.”

Case study: Anonymous Fleet

One fleet manager, who asked not  to be identified, has seen all but three employees give up the benefit over  the years.

He explains: “We have more  than 100 employees entitled to the provision of company fuel for private use and all but three have given it up.

“Those that have given it up have calculated that they do not travel enough private miles to make it a financial benefit. Every year I do a calculation for those continuing to take the benefit highlighting the tax charge, the fuel cost and breakeven mileage and each year they claim that company-funded fuel remains a benefit to them. The company would buy out the benefit, but it is not something they wish to give up.”

Calculating the cost of company-provided fuel for private use

When calculating the cost to employees and employers of company-provided fuel for private use, separate calculations have to be made by both parties.

For employees, the key numbers are the company car fuel benefit charge multiplier – £22,100 in 2015/16 – the car’s CO2 and fuel economy, the personal tax rate (20% or 40%), the price of fuel and private mileage.

The net cost to the company takes account of the cost of fuel, Class 1A national insurance at 13.8% due on the benefit charge, the VAT fuel scale charge minus the ability to recovery VAT on the fuel purchased at 20% and corporation tax relief at 20%.

In the calculations below, annual company car private mileage of 12,300 miles has been assumed based on the Department for Transport’s annual National Travel Survey.

Its data suggests that average annual company car mileage is 18,600, which is made up of 6,300 business miles, 7,600 commuting miles and 4,700 ‘other’ private miles. As a result total average private mileage is 12,300 miles. That compares, says the survey, with average private own car mileage of 7,500 miles a year.

The sample calculations show that in example one ‘free’ fuel in 2015/16 is actually costing the high rate taxpayer almost £950, while the cost to the employer is more than £1,200. In example two, the basic rate taxpayer saves almost £160 by retaining the ‘perk’, but the cost to the employer is more than £760 a year.

Meanwhile, it is likely that all employees driving plug-in hybrid vehicles will save money if they receive free fuel as CO2  emissions on cars are low – 5% in 2015/16.

However, it is equally certain that net cost of fuel to the employer will be significant, critically depending on the proportion of miles driven using electricity versus petrol or diesel and real world fuel economy as official combined cycle fuel economy is likely to be completely unachievable.

The Miles Consultancy (TMC) holds  real-world fuel economy data on tens of thousands of vehicles. “In respect of hybrids the data reveals large variations from driver to driver and between manufacturers’  official and real-world fuel consumption and, for plug-in hybrids, it suggests an even greater degree of variation in both respects,” said Paul Jackson, managing director of the fuel card and mileage expense management specialist.

TMC data on the Mitsubishi Outlander,  Britain’s best-selling plug-in car, suggests the model achieved as little as 33mpg.

Assuming 12,300 private miles a year, the cost of fuel (£5.29 a gallon) is £1,972. But the employee’s BIK is £442, while the net cost  of fuel to the company is £1,435.71.

“Wide disparities between official and real-world fuel economy figures are yet another argument against giving ‘free’ fuel because any extra cost is from the employer’s pocket,” added Jackson.