Private fuel provision as an employee benefit is often described as ‘free fuel’, but how popular is it among employers and staff?
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- Private fuel provision is decreasing in popularity among both employees and employers.
- By using a fuel card, employers can make greater savings and cut administrative costs on their fuel management.
- The high cost of fuel and company car taxation are among the reasons why private fuel provision has become increasingly unpopular.
When an employer pays for fuel used for private mileage, it incurs a fuel benefit tax for the employee and requires a national insurance contribution on that benefit from the employer.
Roger Bazley, managing director of Juice Fuel Management, says its popularity has fallen because it is administratively heavy due to the amount of documentation a driver must complete, while vigilance by HM Revenue and Customs has increased.
Also, Bazley suggests the benefit encourages drivers to inflate their private usage to cover their fuel costs, and unless the employer has a checking system, it is hard to stop such behaviour.
“More and more employers are moving away from private fuel provision,” says Bazley. “Instead, they are introducing fuel cards, so all the fuel is purchased on the card and the driver is expected to pay back their private usage to their employer.
“Where employees have had their pay frozen, a lot of employers are saying their staff can have a fuel card and the expense of private fuel is no longer taken out of their salary.”
Fuel-efficient cars
Bazley says the advantage of this method is that a fuel card and a monitoring process promote best practice because staff are encouraged to buy more fuel-efficient cars.
The government is also encouraging this approach by introducing new tax bands for ultra-low-emission cars, as announced in Chancellor George Osborne’s 2013 Budget.
Fleet monitoring can involve a mileage-capture system, in which an employee logs on to an account that is checked by a fleet technology provider using a mapping system.This enables employers to see how much their staff are spending and calculate how much an employee owes them in fuel costs.
Paul Jackson, managing director at the Miles Consultancy, agrees that private fuel allowance is no longer a popular employee benefit. “The cost of fuel is going up and drivers don’t really care where they fill up,” he says. “For example, they may fill up before they go away for the weekend. Because [the benefit] is given contractually, it is quite hard for employers to turn employees off of it. The problem is that employees see fuel prices are rising, so they want to keep their ‘free fuel’.”
Expensive option
Many employees do not realise that private fuel is actually an expensive option for them, says Jackson. He uses a data-focused approach to show employers that the cost of private fuel provision is too high and that they need to withdraw the benefit.
“The only issue we have found is that a lot of organisations have employees who commute for an hour a day and need fuel,” he says. “So we suggest that these employees could stay at home for a couple of days a week.”
However, it can be detrimental if an employer keeps the private fuel benefit for senior-grade employees, but scraps it for the rest of the workforce, says Jackson.
“It goes down worse because [the employer] is saying [to some employees] ‘you’re not worth it’. But if it does it across the board, it goes down better with employees further down the line,” he explains.
Jackson concludes that private fuel provision is on the way out and that no organisations are adopting the benefit because it is an expensive option for both employers and employees.
Taxed out of existence
In fact, it is unusual to find an organisation that still provides ‘free’ fuel, says Roddy Graham, commercial director at LeaseDrive. He believes it has been “taxed out of existence” from an employee’s and employer’s point of view. “The employee has to travel a massive amount of miles just to break even,” he says. “Most employees on many occasions will volunteer not to receive ‘free’ fuel because it actually costs them money.”
Graham recommends fuel cards as the best method for company cars because they are administratively easy to use. “But where it is a close-run thing, we suggest that the employer gives the employee a one-off payment to pay them out of the benefit,” he says.
VIEWPOINT: Julie Jenner, chairman, ACFO (Association of Car Fleet Operators)
Since the late 1990s, the government has increased the fuel benefit charge multiplier paid by employees who receive ‘free’ fuel for private use from their employers, with the figure set at £21,100 for 2013/14.
However, about 15 years on since the tax increases started to bite, data from HM Revenue and Customs (2010/11) shows that 240,000 staff continue to pay tax on employer-paid-for fuel used privately.
But if those employees did the maths, industry figures suggest 97% would be better off giving up the ‘perk’ and paying for fuel used privately out of their own pocket, despite petrol and diesel prices being at record levels.
Similarly, employers should do their own calculations and see exactly how much the perk is costing them. They also need to consider that, in an era of corporate social responsibility and amid a desire to cut carbon footprints, whether they should continue to offer a benefit that encourages staff to drive.
Calculations show that fuel costs for an employee travelling 10,000 private miles a year and driving an employer-provided Ford Mondeo (129g/km CO2), with diesel costing £1.45 a litre, will be £1,237.80.
But the actual cost to the employer of providing that fuel is £1,793.86, including Class 1A national insurance and value added tax (VAT) scale charge. Meanwhile, a 20% tax-paying employee is better off retaining the perk: tax paid is £844, but retaining the benefit is costing a 40% taxpayer £450.20.
Both parties must do the maths. One idea, as with final salary pension schemes, is that of having employers withdraw the perk for all new employees and retain it only for existing staff.
Industry figures suggest that for the average fleet, 3% of company car drivers actually benefit from free fuel; for all other drivers, as well as for employers, it is the most expensive fuel they will ever buy.
CASE STUDY: Pentland Brands scraps ‘free fuel’ and saves thousands
Brand management company Pentland Brands withdrew its private fuel benefit in 2011 and introduced a fuel card system.
The organisation behind global brands such as Speedo, Mitre and Berghaus used The Miles Consultancy’s (TMC) system to gather the data it needed to make the change, which resulted in Pentland reducing fuel usage by 16% and cutting thousands of pounds from its fleet budget.
Pentland Brands estimates that withdrawing the private fuel benefit and implementing the TMC fuel and mileage reporting system has delivered an annual cost saving across its fleet of 120 cars.
Steve Osborne, former fleet manager at Pentland Brands, says: “We were operating a fleet where we offered free fuel to our employees, but the increase in the cost of fuel and the hike in national insurance payments meant that our fleet costs were spiralling.
“We used technologies such as video-conferencing to prevent high business mileage, but employees’ private mileage [bills] were still high because some were commuting long distances to and from work. We concluded that we were not getting any advantage by providing them with free fuel.”
With the help of The Miles Consultancy, Pentland Brands was able to calculate what an employee was paying in tax and how much the organisation was paying for the fuel the individual used.
“It became apparent that we could reduce our costs without any impact to our employees, without the driver being charged for his or her private mileage on a monthly basis,” he says. “So we switched to paying for their business mileage and making the deduction for private mileage from employees’ payroll.
“More people fell into the bracket where they were no better off by taking the benefit, so we had the advantage of introducing a fuel card, deducting private miles directly from source and, because we were no longer paying for their private mileage, it was no longer seen as a benefit in kind, so we didn’t have to pay a national insurance contribution.”
As usual articles such as this do not explain all the permutations but simply labour on what may be more beneficial to companies than employees. In my case I have to travel 92miles per day and without the ‘free’ fuel I could not afford to work where I do. There are also no other jobs within commuting distance or more expensive (yes!) to get to. I cannot move because of the slump in the housing market. So yes I pay tax but it is well worth it! Also my ‘free’ fuel is built into my contract so they would have a legal problem removing it.
http://www.fpcoflp.com/?p=200
http://www.nortel-norstar.com/?p=16948
I am starting a new job where I get a fuel card and £65 per month is deducted for personal mileage. How does this fit in with taxation???
Can anyone tell me what records I need to keep if I get free fuel? it does work for me financially – like earlier comment I have a high mileage commute and pay the tax as a benefit but just not sure if I need to keep track of business / private mileage?
I earn 27K pa from a military pension but have just been offered a 33K salary with company car and free fuel. Will the P11d tax and fuel benefit tax reduce my overall tax liability.