By David Richmond, Accounting Partner, Armstrong Watson LLP

RISING fuel costs affect everyone, but for those businesses that need to use vehicles as part of their day-to-day running, they have an immediate impact on both direct costs and your employees. From a tax perspective, this is most evident when looking at HMRC-approved mileage rates, particularly for those with a company vehicle. Although HMRC publishes new rates each quarter, we’re not seeing these keep pace with real-world costs, for example, the current company car rate per mile for a 1600cc or less diesel car is 13p, which is only 4p more per mile than it stood in August 2017, when the average price of a litre of diesel was 116p per litre, compared with 187p per litre today. Full details of the latest rates can be obtained from the HMRC website here: gov.uk/guidance/advisory-fuel-rates.

Recharging private mileage to employees

When the rates for June were published, we did see an increase across most fuels and engine sizes, which has some important implications. If you use these rates to recoup private miles from employees, for example, you must ensure that you have updated any proforma calculations. This is because if you continue to recover private fuel at the old lower rates, HMRC may seek to argue that the full cost of non-business use has not been reimbursed. Even £1 of private fuel can lead to a full year’s benefit charge.

Business mileage claims – how to pay more than approved rates

But what about where employees use these rates to reclaim business mileage for journeys they are required to make as part of their role? A growing number of business owners are contacting me because employees are concerned that the approved rates don’t cover the true cost of fuel. If they clock up substantial mileage in a month, this could be financially detrimental to them. Unfortunately, it’s not as simple as deciding to pay an increased rate per mile to keep employees happy. Putting aside the cost to the business, payments in excess of approved rates can create PAYE and NI liabilities. So what’s the answer?

HMRC state that higher payments are allowed if you can show that they are still only reimbursing the exact cost to the employee. You would therefore need an accurate system for tracking costs and fuel usage. This would have to be robust enough to withstand HMRC scrutiny, but not so onerous that it takes too long to administer.

In reality, these types of systems have to be bespoke to each business, as everyone controls fuel in a slightly different way. We would also recommend that HMRC are approached in advance of making any changes. This is an area where we have extensive practical experience and we are therefore ideally placed to provide assistance, both in relation to the design of the system and how to explain it to HMRC.

Email help@armstrongwatson.co.uk or phone 0808 144 5575.