COMPANY CARS - 12.04.2021

Poor mileage records lead to tax bill

Generally, it’s not tax efficient for the business to pay for private fuel as it results in a fixed and hefty tax bill. Avoiding this is easy in theory but less so in practice as a recent case shows. What’s the story?

Tax charge for cars

If the company pays for even £1 of fuel for an employee’s private travel the full taxable benefit applies (and this can be almost £9,000 for 2020/21). The result is a hefty tax bill for the employee and a Class 1A NI charge for the employer. This is the so-called car fuel benefit charge.

Avoidance tactic. The way to swerve this is relatively simple in theory: the employer just avoids paying for fuel for any purpose other than for business. But in practice that’s difficult to achieve, as a recent case suggests. Contract Services (Millenium) (CSM) provided some of its staff with company cars, which they could use for private and work purposes. However, they were required to replace or repay the company for all fuel they used privately. This is in line with HMRC’s “reimburse or replace” thinking.

We have a problem

Following a compliance check of CSM’s records HMRC considered that the company should have reported car fuel benefit for the employees on Form P11D for more than one year. The Class 1A NI bill for this was more than £5,500. And on top of that HMRC hit the firm with penalties of nearly £1,000. CSM disputed the NI assessment and appealed to the First-tier Tribunal (FTT). It argued that it had taken the appropriate steps to prevent the car fuel benefitcharge from applying. The FTT accepted this argument but CSM had failed to provide adequate records to show that the amounts reimbursed accurately represented the cost of fuel for private mileage. HMRC therefore couldn’t be sure that such fuel costs had been paid for by their employees rather than the employer. The NI charge and penalties stood.

Accurate record keeping

This case demonstrates that a policy stating that employees should not use the fuel for private purposes without reimbursing the costs is not enough to avoid the tax and NI.

Tip. Where the employer pays for fuel, the tax and NI charges can be avoided with the employee reimbursing the cost of any fuel they use for private journeys. Advisory rates are available on the HMRC website (see The next step ).

Tip. The policy for employees with company cars should say that detailed mileage logs must be kept, and a copy provided, say, every month. There are many mileage tracking apps employees can use to help with this.

Tip. To prevent the car fuel benefit charge from applying, the firm’s company car policy should say that employees must reimburse the company for any private mileage fuel no later than 6 July following the end of each tax year.

Tip. Instead of having to rely on employees keeping logs of private mileage, they can instead 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 falling foul of the car fuel benefit charge .

For the advisory fuel rates, visit https://www.tips-and-advice.co.uk , Download Zone, year 13, issue 7.

A staff policy stating that company cars can be used for private journeys as long as costs are reimbursed is not enough. Accurate records of this mileage need to be kept. If not, the company risks falling foul of the car fuel benefit charge and ending up with a hefty bill.

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