If your business provides company cars to employees and also covers the cost of their fuel for private use, you may be subject to a Fuel Scale Charge. This charge is a way for HM Revenue and Customs (HMRC) to recoup the tax on the private use of fuel that is paid for by the company, rather than the employee.
This blog will break down what the Fuel Scale Charge is, how it works, and how businesses can manage it.
What Is the Fuel Scale Charge?
The Fuel Scale Charge (FSC) is a flat-rate charge that applies to businesses that supply fuel for private use in company cars. It is designed to tax the benefit that employees receive when their employer pays for fuel used for non-business purposes.
In the UK, if a business pays for fuel that is used privately by an employee, it’s considered a benefit-in-kind (BIK) for tax purposes. Rather than calculating the exact amount of private fuel usage, HMRC offers a simplified way to tax this benefit through the fuel scale charge.
How Does the Fuel Scale Charge Work?
The fuel scale charge is calculated based on the CO2 emissions of the company car. HMRC publishes a Fuel Benefit Charge multiplier each year, which is used in conjunction with the CO2 emissions rating of the vehicle to determine the taxable amount. For the 2024/25 tax year, the multiplier is set at £27,800.
To calculate the amount of tax due, you take the fuel benefit charge multiplier and multiply it by a percentage that corresponds to the car’s CO2 emissions. The result gives you the value of the benefit, which is then used to calculate the tax.
For example, if a car has a CO2 emissions rating of 120g/km, the percentage used might be 29%. Applying this to the £27,800 multiplier, the taxable benefit for the fuel would be:
£27,800 x 29% = £8,062
This figure is added to the employee's taxable income, and the tax payable depends on their income tax band (20%, 40%, or 45%).
Who Pays the Fuel Scale Charge?
It’s important to understand that the employer and the employee may both have responsibilities when it comes to fuel for private use.
Employer: The company must report the benefit on the employee’s P11D form and pay the employer's Class 1A National Insurance Contributions (NICs) on the value of the benefit. Additionally, the company must account for the VAT on the fuel scale charge.
Employee: The employee will pay income tax on the value of the fuel benefit as it is added to their taxable income.
VAT and the Fuel Scale Charge
In addition to income tax and NICs, businesses that are VAT-registered must also account for VAT on the fuel scale charge. This is because the company is providing a benefit in the form of fuel, which is considered a taxable supply.
To calculate the VAT on the fuel scale charge, businesses use a separate scale published by HMRC, which varies depending on the car's CO2 emissions. Businesses must then include this VAT amount in their VAT returns.
It’s worth noting that once the VAT on the fuel scale charge is paid, businesses can reclaim the VAT paid on all fuel, even the fuel used for private journeys.
Should Your Business Use the Fuel Scale Charge?
The fuel scale charge simplifies the process of taxing fuel used for private purposes, but it’s not always the most cost-effective option for every business. Whether it’s the best choice for your business depends on how much private fuel is being used.
Here are some factors to consider:
High Private Fuel UseIf employees are using a significant amount of fuel for private journeys and the business covers the costs, the fuel scale charge may be a cost-effective and simplified solution.
Low Private Fuel UseOn the other hand, if employees rarely use their company cars for personal travel, the fuel scale charge could result in the business paying more in tax than necessary. In such cases, it might be better to keep detailed mileage records and charge employees for the private fuel they use.
Fuel ReimbursementAnother option is to reimburse employees for their business mileage only. This can help avoid the fuel scale charge altogether, as the business would not be paying for private fuel use. This approach requires employees to keep accurate mileage logs.
Alternative BenefitsSome businesses opt to pay employees a fuel allowance rather than provide fuel directly. This approach allows employees to cover their own fuel costs, avoiding the fuel scale charge. However, the allowance may still be considered a taxable benefit.
How to Avoid the Fuel Scale Charge
Businesses that do not want to be subject to the fuel scale charge can avoid it by making sure that employees fully reimburse the business for any private fuel use. This can be done by keeping detailed mileage logs and requiring employees to repay the cost of their private mileage based on fuel receipts or a set pence-per-mile rate.
If the employee reimburses the full cost of private fuel use, the company will not need to report the benefit to HMRC, and the fuel scale charge will not apply.
Conclusion
The Fuel Scale Charge is a simplified way for businesses to account for the tax and VAT on private fuel use in company cars. While it provides convenience, it may not always be the most cost-effective option for every business, especially if private fuel use is low.
By understanding the rules and exploring alternative methods such as fuel reimbursement or allowances, businesses can better manage their tax liabilities and potentially reduce the costs associated with providing fuel to employees.
It’s always advisable to seek professional tax advice to ensure your business is making the most informed and beneficial decisions when it comes to the Fuel Scale Charge and company car benefits.
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