Taxes

The Ultimate Guide to Advisory Fuel Rates

Nigel Graber
Rush hour on the A38(M)urban motorway at Aston, Birmingham, UK|Advisory Fuel Rates For Tax Relief

Maybe you drive an Insignia. Or, if you’re lucky, a BMW 3 Series. You love hanging your jacket up on that peg in the back. You’ve got a wall chart where you tick off motorway services you’ve visited. And you never need to worry about servicing your car or paying for repairs.

Lucky you. You’re a company car driver. Sadly, you can’t claim 45p per mile for business mileage. That’s strictly for drivers who use their cars for business.However, you can claim the cost of fuel for business journeys using the HMRC advisory fuel rates.

What are advisory fuel rates?

Here’s what you need to know about HMRC advisory fuel rates in 2018. They’re the government’s recommended reimbursement amounts when you use your company car for business travel.How are advisory fuel rates calculated? They’re based on engine size and type of fuel. (There’s more detail about this below.) There are rates for diesel cars and rates for petrol cars. Petrol cars with big engines have the highest HMRC advisory fuel rates.

The rates are lower for LPG and diesel-powered vehicles with smaller engines. If you drive a hybrid, you can claim either the rate for diesel cars or the petrol rate. The choice is yours.Of course, fuel prices change with the wind blowing over from the Persian Gulf. So HMRC updates the advisory fuel rates every quarter. The latest ones came into effect on 1 December 2018. The good news is you can use old rates for up to a month after the new figures are issued.

Why use advisory fuel rates

There are rules that businesses have to stick to about tax and Class 1A National Insurance costs when it comes to fuel for company cars. HMRC advisory fuel rates exist to help them do just that.When you get reimbursed for your fuel after a business trip, if your company pays for the expense at or below the advisory fuel rate, they don’t have to pay Class 1A National Insurance. They also ensure that they don’t make any profit from taxation.That said, businesses can use their allowance where a lower rate is needed. For example, if their cars are more fuel-efficient than HMRC’s rates suggest, your company could choose a lower rate.

They could also pay above it. But they'd have to prove that their cost per mile was higher than the suggested rate.Also, when you need to repay fuel costs for your personal trips in your company car, you must pay at least the advisory rate. Otherwise, HMRC might think there’s a fuel benefit charge.The advisory fuel rate isn’t, however, binding. But companies will need to show the amount they pay covers the full amount of personal fuel cost, even when it’s below the guideline rate.

Latest advisory fuel rates

Here are the most recent advisory fuel rates for petrol, liquefied petroleum gas (LPG) and diesel fuel:[table id=44 /][table id=45 /][table id=46 /][table id=47 /]

How advisory fuel rates work

If you use a company car, you usually face one of three scenarios. Advisory fuel rates will affect you differently depending on your circumstances.

Scenario 1: You pay for your company car’s fuel out of your pocket

This applies to you if your employer pays you back for the fuel you spend on business journeys. It also applies if your employer chooses not to cough up at all.If you do get reimbursed, make sure you’re paid HMRC’s advisory fuel rate. In the cases where you’re lucky enough to get a higher rate, your employer must prove that the actual fuel costs are higher than the advisory fuel rate. If not, you’ll have to pay tax and National Insurance on the difference.For employers that don't pay you any costs or they pay less than the advisory fuel rate, you can claim tax back on the difference (more on this later).

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Scenario 2: You pay for fuel using a company card and reimburse your employer for the cost of personal journeys

Do you pay for your private fuel use? If so, your employer might ask you to use the relevant advisory fuel rate.However, you might be able to pay less. You just have to prove the amount is equivalent to the full cost of your private fuel use.

Scenario 3: Your employer pays for all your fuel usage

Hey, maybe your employer pays for both your business and private fuel usage? Congratulations. But you’ll have to pay fuel benefit tax. The tax is a fixed amount calculated by working out your BIK (Benefit-in-Kind) percentage banding. That’s a mathematical formula based on your car’s value, fuel type and CO2 emissions.If you’re continually slogging up and down Britain’s motorways, you’ll usually pay less in fuel benefit tax than with advisory fuel rates.

Claiming tax relief on fuel for a company car

Yes, you can claim tax back on fuel costs. Provided:

  • Your employer pays you less than the fuel advisory rate. You can claim tax back on the difference.
  • Your employer doesn’t pay you for fuel costs at all.

In either case, you’ll need to fill in HMRC Form P87, or a self-assessment tax return if your claim exceeds £2,500. Keep records as evidence of where you’ve been and what you’ve spent on fuel.

Electric cars now included in advisory fuel rates

In September 2018, the advisory fuel rates for the first time contained an advisory electricity rate alongside the rates for petrol, diesel and LPG cars.HMRC has set the initial rate for electric cars at 4p per mile. The government has said that if businesses pay up to this rate, they’ll consider them not to have profited. That means they won’t be subject to taxable profit or Class 1 National Insurance.

On a similar basis to advisory fuel rates, employers can use their rate which better reflects their circumstances if, for example, their cars are more efficient, or if the cost of business travel is higher than the guideline rate,’ said an HMRC statement.

However, if they pay a rate that is higher than the advisory fuel rate and can’t demonstrate the electricity cost per mile is higher, they will have to treat any excess as taxable profit and as earnings for Class 1 National Insurance purposes.

The move is a triumph for fleet organisations, which have for some time pressured HMRC to come up with fuel rates for electric and hybrid vehicles. They believe that not publishing them is a disadvantage to eco-friendly businesses.

Fleet-industry summit

At a fleet-industry summit last year, the fleet organisation ACFO — the Association of Car Fleet Operators — called on HMRC to recommend advisory fuel rates for fully electric vehicles, range-extended electric vehicles, and plug-in hybrid models. ACFO gave HMRC recommended reimbursement rates and related calculations.The pressure group then launched an online petition, which gained support from fleet managers with responsibility for over 120,000 cars.

John Pryor, chairman of ACFO, said he was ‘delighted’ with the news: “Historically, HMRC has consistently said that it did not consider electricity to be a fuel, so for it to make this change is a major leap and will assist all fleets operating and seeking to introduce pure electric cars.”He was, however, disappointed HMRC had not supported ACFO’s call for the rate to be applied to plug-in hybrids and range-extended electric cars.

Pryor said, “An increasing number of such vehicles will find their way onto company car choice lists due to their benefit-in-kind tax efficiency.“Plug-in hybrid vehicles are at their most efficient when driven for as many miles as possible on electric power.“Therefore, particularly with technology advances likely to increase the electric range of such cars, publishing appropriate advisory electricity rates for plug-in hybrid cars will help to encourage drivers to use the car in the optimal environmentally friendly way.”

All clear? Good news. Now go carefully and watch those average-speed checks on the M6.