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The advisory fuel rates are issued by HMRC from time to time. These are rates published as guidelines by the government of UK and used by employers for reimbursing employees who travel in a company owned car for official or business purpose. An employee is not supposed to claim expenses on personal trips. The rates are strictly for expenses incurred on business trips in a company car.

The rates are applicable in following instances:
  1. An employer reimburses its employees for business trip company owned cars
  2. An employee needs to pay back the expense of fuel utilized for personal travel
New advisory fuel rates for company car owners from March 2019

Current Advisory Fuel Rates (AFR) to be effective from 1 March, 2019

Engine Size Petrol (per mile) LPG (per mile)
1400 cc or less 11 p 7 p
1401 cc to 2000 cc 14 p 8 p
Over 2000 cc 21 p 13 p
Engine Size Diesel (per mile)
1600 cc or less 10 p
1601 cc to 2000 ccc 11 p
Over 2000 cc 13 p

Here, it is pertinent to mention that if the company car is electric, Advisory Electric Rate (AER) will be 4 pence per mile.

Read More: Foreign Business Travel Expenses and Allowances Explained

In case of hybrid cars, separate AER rate is not applicable. Hybrid cars are considered either in the category of petrol or diesel cars. Previous rates can be applied for a month after new rates have become effective.

Methodology of calculating fuel rates

The AFRs issued by HMRC are directly linked to current fuel prices in the market. Hence, the rates are as accurate as possible. Additional parameters that can impact fuel efficiency and hence, fuel cost like quality of road, factors related to different seasons, fuel efficiency of vehicles are also taken into consideration.

The HMRC AFRs are revised on every quarter so that the rates reflect the current market trends and other dynamic factors.

Benefits of using AFRs

The AFRs are structured as guiding principles to facilitate companies in following right processes for tax and National Insurance (Class 1A) costs. If an employer reimburses at the rate that is same or lower than advisory fuel rates, it is presumed by HMRC that there is no taxable gain or any Insurance cost to be paid.

There may be scenarios where companies may be better off setting their own fuel rates. This may be applicable incase the company is using highly fuel efficient cars or overall fuel cost on company cars is higher than what HMRC envisages.

Employer paying rates higher than AFRs

Company car fuel rate more than HMRC’s advisory rates can be applicable in cases where actual cost of fuel per mile is more in a company’s cars. However, if the same is not true, it would effectively mean that the company is reimbursing fuel costs to its employees even for purposes other than business purpose. A company reimbursing its employees for personal trips needs to pay an additional charge called fuel benefit charge. This is a tax that is applicable to companies paying its employees for personal travel.

In a nutshell, if a company is reimbursing more than its actual business expenses, the additional amount that is being paid is considered taxable gain for Class 1A Insurance purposes.

Employer paying rates lower than AFRs

If an employer pays rates lower than HMRC’s advisory rates, the employee is entitled to claim the shortfall amount from HMRC at the end of financial year. This is covered under Mileage Allowance Relief.

Employee claims reimbursement for personal trips

In cases where an employee is using a company owned car whole time for business as well as personal travel and the company is reimbursing all expenses, the employee is expected to pay back all the reimbursements against personal trips. If not so, the reimbursements on personal trips have to be reported to HMRC and subsequently, the employer needs to pay fuel benefit tax on the payments made for personal travel.

Self employed individuals

For self-employed individuals, the concept of company owned cars do not apply since there is no separate company that can exist apart from the individual. Hence, Advisory Fuel Rates issued by HMRC are not applicable for self employed people.

Instances where employee uses private car for business purpose

There may be instances where an employee finds it more convenient to use own car than to use a company owned car. In such cases, the employee can claim mileage allowances for personal car. However, specific conditions need to be complied with to be eligible for mileage allowances.

An eagle’s eye view of how AFRs are calculated

Advisory Fuel Rates are calculated based on oil prices as outlines in table below.

Petrol

Engine Size (cc) Mean MPG Applied MPG Fuel Price (per litre) Fuel Price (per gallon) Pence per mile AFR
Up to 1400 57.5 48.9 119.0 541.2 11.1 11
1401 to 2000 47.0 39.9 119.0 541.2 13.6 14
Above 2000 30.8 26.2 119.0 541.2 20.6 21

LPG

Engine Size (cc) Mean MPG Applied MPG Fuel Price (per litre) Fuel Price (per gallon) Pence per mile AFR
Up to 1600 46.0 39.1 59.4 270.0 6.9 7
1601 to 2000 37.6 32.0 59.4 270.0 8.5 8
Above 2000 24.7 21.0 59.4 270.0 12.9 13

Diesel

Engine Size (cc) Mean MPG Applied MPG Fuel Price (per litre) Fuel Price (per gallon) Pence per mile AFR
Up to 1600 72.2 61.4 129.2 587.5 9.6 10
1601 to 2000 60.9 51.8 129.2 587.5 11.4 11
Above 2000 53.3 45.3 129.2 587.5 13.0 13
  • MPG- Miles per gallon; Mean MPG is obtained from manufacturers
  • Applied MPG – is MPG attuned down by 15%. This ensures actual road conditions and fuel efficiency for old cars are taken into account.
  • In case of LPG: MPG is considered 20% lower than for MPG of petrol.

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