Benefits review
Cutting discretionary expenses
Andrew Jones on managing the burden of the fuel benefit charge
Providing a company car for private travel has long been used as an incentive for recruiting and retaining quality staff. Indeed, as many as two thirds of companies still offer a company car or car-leasing scheme.
But the tax levied on private fuel use – in the form of Class 1A National Insurance contributions (NICs) – is costing businesses millions of pounds each year. And since these charges were effectively raised by a costly 17% in April 2008, many more employers are now reviewing this area of spend as a way of cutting discretionary expenses.
Taxing the benefit
Tax on private fuel benefit is charged to both the employer, in the form of NICs, and the employee, in the form of income tax.
The taxable benefit paid by the employee is calculated as a percentage of a fixed figure, or multiplier, which now stands at £16,900 – up from £14,400 before 6 April 2008. The percentage depends on the CO2 emission rate of the car and varies from about 12% for hybrids, to 18% for new diesels, up to a maximum of 35% or almost £6,000 a year for the heaviest polluting cars.
As well as paying the cost of fuel for private use, the burden also falls to the employer to pay 12.8% of the taxable benefit, or £757.12 for the heaviest polluting cars.
Because the amount paid by the employee is fixed no matter how many miles they travel, there is little incentive for them to limit their journeys or fuel consumption. In fact, to get the best return on the private fuel provision, it is in the employee's interest to use their company cars for as many private journeys as possible while their employer pays for the fuel.
In a business environment where an organisation's commitment to reducing its carbon footprint is considered an important business credential, an initiative that effectively encourages car travel could be viewed as a serious shortcoming,
Overcoming obstacles
Employers understandably fear that withdrawing the private fuel perk and charging employees for the fuel they use to make personal journeys will de-motivate and alienate their employees.
Another stumbling block which prevents employers from pursuing this saving is the assumption that identifying private use and then recovering deductions from employees is too difficult to do cheaply and easily.
With the economic downturn creating more pressure on employers to rein in non-essential spending, finding a way to manage this tax burden effectively while keeping employees motivated has become an important goal for businesses.
Recovering costs
The provision of fuel together with the tax costs of private fuel benefit are, in many cases, significantly greater than the cost of reviewing and increasing an employee's salary to offer some compensation for removing the benefit and making him or her pay for fuel themselves.
Changing the way company car use is measured and financed is presumed to be a complex and time-consuming administrative task so finding a way to do this quickly and cost effectively is critical for businesses.
Establishing the split between legitimate business journeys and private travel quickly and accurately is pivotal to avoiding this tax burden. A range of online technologies are now emerging that enable employers to calculate private use of a vehicle as a by-product of their expenses procedures.
These allow employees to accurately record their own business mileage by entering their departure and destination points for trips to meetings or between company sites. They also provide the facility for employees to make good the cost of fuel for private use by creating automatic deductions, which are processed as part of the payroll function.
Rather than plotting personal journeys, each employee simply submits their vehicle's odometer reading at the end of each month and, together with the business miles they have recorded during the month, the total private mileage for that period can be reached.
An equivalent fuel deduction value is then calculated and automatically deducted from the employee's wage, therefore reducing the administrative burden of capturing, recording and processing business and private mileage.
Managing travel expenses well can also be a cost-saving exercise, with total savings in excess of 10% of the annual mileage budget for organisations that measure journeys more accurately.
Growing tax liabilities and the need to manage unnecessary costs is more important than ever. Finding a way to shed the burden of the fuel benefit charge as part of an organisation's payroll and expenses management processes is now pivotal to managing the cost of company cars.
Andrew Jones is customer relationship manager at Premier Envoy