Advisory fuel rates

Miles to claim before you pay

We all know employees can claim deductions at approved business mileage rates when they use their own vehicles for business purposes. However, what if the company’s car is used for PERSONAL PURPOSES by an employee or quite the reverse, its fuel cost is being paid by them while on BUSINESS TRAVEL? In both cases business mileage allowance will not be available as the employee’s own car isn’t being used as it is the company`s car which made miles. So, the question that arises here is - how will the expenses paid out of the employee’s pocket for use of the company’s car, be treated for the purpose of taxation. Let’s unveil the answer to this question.

When the company’s car is used - the buying cost, cost of repairs, maintenance, insurance etc. are all paid by the company. So when the employee uses the company’s car the only cost he/she is responsible for is the fuel expense. If the business is VAT registered and the employer reimburses the employee for fuel expenses then, it shall become eligible to reclaim VAT portion of the fuel cost which makes calculating the fuel cost a vital matter.

To begin with, HMRC issues advisory fuel rates every quarter. By applying these rates one can calculate the fuel portion of the mileage claim. (Download our business mileage allowance calculator to calculate mileage claim.)

The advisory fuel rates have two uses:

1. To calculate how much employees need to reimburse their employer for use of the company vehicle for personal travel.
2. To calculate how much employers need to reimburse an employee for fuel expenses that they are responsible for a company car on business travel.

It is essentially used to calculate the fuel portion of the mileage claim.

Advisory fuel rates

Current advisory fuel rates 2020 (AFR) per mile are:

Note that you can use the previous rates for up to 1 month from the date the new rates apply.

HMRC mileage rates for hybrid cars: HMRC treats hybrid cars the same as either petrol or diesel cars for this purpose.

HMRC mileage rates for electric cars: If the car is fully electric, the Advisory Electricity Rate (AER) of 4p per mile shall be applied.

How to calculate VAT reclaim on mileage?

After calculating the fuel portion from the mileage claim the next step is to figure out the VAT portion of the fuel cost. The current VAT rate on fuel is 20%. So, as the fuel portion already includes VAT, the VAT portion will be calculated by multiplying 1/6 with fuel cost.

Let us follow it with a few examples

Example 1: Car used for business purpose

Total miles travelled by employee using the company’s petrol car = 12,000 miles
Travelling is for business purpose
Car’s engine is of 1400cc

Then,
AFR applicable will be 10p per mile
Total fuel portion = 12,000 miles x £0.10 = £1,200
Now let’s calculate the VAT portion = £1200 x 1/6 = £200

The company will reimburse employees with £1,200 and reclaim VAT amounting to £200.

Example 2: Car used for personal purpose

Total miles traveled by employee using the company’s diesel car = 2,000 miles
Travelling is for personal purpose
Car’s engine is of 1400cc

Then,
AFR applicable will be 8p per mile for a diesel car with a 1400cc engine
Total fuel portion = 2,000 miles x £0.08 = £160

In this case, the employee will be required to pay the employer £160 for use of the company’s car for personal purposes.

Example 3: Calculation of Approved Fuel Rates, fuel portion as per AFR and VAT that can be claimed back on fuel expense

Total miles traveled by employee using his own petrol car= 6,000 miles
Travelling is for business purpose
Car’s engine 1400cc

Then,
Mileage allowance to employee at approved mileage rate per mile (i.e. 45p per mile in this case) = 6,000 miles x £0.45 = £2,700
Total fuel portion at advisory fuel rate (i.e. 10p for car with 1400cc engine) = 6,000 miles x £0.10 = £600
VAT portion = £600 x 1/6 = £100

In this case, the company will reimburse employee with £2,700 for the cost of travelling using his own car. The company can claim back £2,700 from its profits as an expense. It can reclaim VAT amounting to £100.

Summary:

Step 1: Calculate mileage allowance as per approved mileage rates
Step 2: Calculate fuel portion as per advisory fuel rates
Step 3: Calculate the VAT portion as 1/6 of the fuel portion calculated in Step 2.

Difference between advisory fuel rates (AFR) and approved mileage allowance (AMA)

Firstly, advisory fuel rates are used when a company’s car is used by employee whereas approved mileage allowance is used when an employee’s own car is used for business travel.

Secondly and most importantly, AFR only covers for fuel expense since the employer is already paying for the car. On the other hand, AMA covers the cost of insurance, repair, maintenance etc.  AFR can be used to assess how much of the annual business mileage is spent on fuel, regardless of the fact whether a company’s or own vehicle is used.

What if the fuel portion is claimed at a rate different from the advisory fuel rates?

HMRC fuel rates are advisory in nature. The businesses are not bound to use them. They can choose to use the rates that reflect their respective circumstances.

If the employer pays employee at a rate LESS THAN or EQUAL to advisory fuel rates, then HMRC accepts that there isn’t any taxable profit and no Class 1A National Insurance to pay.

If the employer pays employee at a rate MORE THAN advisory fuel rates and CAN prove that the fuel cost per mile is higher than AFR, then HMRC will accept that there isn’t any taxable profit and no Class 1A National Insurance to pay.

If the employer pays employee at a rate MORE THAN advisory fuel rates and CANNOT prove that the fuel cost per mile is higher than AFR, then the excess will be treated as taxable profit and as earnings for Class 1A National Insurance contribution.

Conclusion

Claiming mileage might look like a complicated task. It is important to understand the HMRC mileage rates and how to use them. Whether you are an employer who is required to reimburse to employees or an employee who needs to repay the fuel expenses, we’ve got your back in either case.

The concept of AFR and AMA might make you a little confused. Find out more Approved mileage allowance in our article to get a precision of AMA payments. Still, confused? Ask us NOW!!!

By Mohit Baheti | February 28, 2020