Many organisations provide several benefits to their employees and reimbursing their fuel costs for business trips is one of them. HMRC has recently updated the advisory fuel rates that will be effective from 1st June 2021. The government has guidelines in place for what can be reimbursed tax-free, please read the full article below to see how:
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What are HMRC advisory fuel rates used for?
To understand HMRC advisory fuel rates, a few factors should be taken into consideration, such as:
- Fuel cost is a business expense if the travel is a work trip.
- Entities usually reimburse employees for a business expense so as long as no profit is made from a business expense, it is not subject to tax or Class 1A National Insurance fees.
Therefore, companies can reduce their tax and insurance bills significantly when they recognise and reimburse fuel expenses.
HMRC has standardised the amount which employers can reimburse free from tax because petrol prices and fuel efficiency vary. When an employee purchases petrol for a work tour, they are paid back by their company at a specified rate.
When do HMRC advisory fuel rates apply?
HMRC business fuel rates apply in two specific cases:
- Employees repaying the cost of private travel in company cars:
When employees use company cars for personal trips, they must repay the company at a rate that is equal to or higher than the advisory fuel rate.
It is also possible to use another rate if the employee has covered the total cost of the private trip.
- Reimbursement for work travel:
The company can reimburse employees for fuel costs incurred during work travel, up to the amount allowed by HMRC.
The company can choose to reimburse employees at a lesser rate than the advisory rate if the company car is more efficient. It is also possible that employee is reimbursed at a higher rate if the company car is less fuel-efficient.
If you reimburse at a higher rate and can’t show that this was necessary, the excess will be treated as taxable profit and will be subject to tax and national insurance.
How are HMRC advisory fuel rates calculated?
HMRC provides the rates, and we have to follow them. Below points should be considered to know about how HMRC advisory fuel rates are calculated:
- HMRC starts with the mean miles per gallon (MPG), taken from manufacturers’ information and then weighted by the number of specific models sold to businesses.
- It then uses applied MPG, which is 15% lower than the mean to account for real driving conditions and the fact that many cars achieve lower fuel efficiency.
- HMRC takes the fuel price from the Department for Business, Energy, and Industrial Strategy and the LPG price from the Automobile Association website.
HMRC then uses this applied MPG, current petrol and LPG prices to calculate its advisory fuel rates.
From 1 June 2021 the new rates advised by HMRC are:
Petrol & LPG rates:
|Engine size||Petrol rate per mile||LPG rate per mile|
|1400cc or less||11 pence||8 pence|
|1401cc to 2000cc||13 pence||9 pence|
|Over 2000cc||19 pence||14 pence|
|Engine size||Diesel rate per mile|
|1600cc or less||9 pence|
|1901cc to 2000cc||11 pence|
|Over 2000cc||13 pence|
The advisory electricity rate for fully electric cars is 4 pence per mile. Hybrid cars can be treated as petrol or diesel cars, as the fuel used in a car. These advisory rates are updated each quarter.
Hopefully, this article has helped you to clarify the advisory fuel rates as per HMRC standards. You should now know exactly how much to reimburse travelling team members and how much they should pay you back for their private trips in company cars.
For a full article and comparison with the previously applicable rates, please click here.