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Advisory Fuel Rates – the right direction of travel?

Advisory Fuel Rates – the right direction of travel?

HR Matters: Advisory Fuel Rates – the right direction of travel?

By Nigel Morris, national PwC Fleet Car Consulting group leader

We have all recently seen a dramatic drop in the level of authorised Advisory Fuel Rates (AFR) from 1 March 2015 in answer to the recent huge drops in oil prices.

HMRC works out the AFR rates by taking the Mean mile per gallon (mpg) published by manufacturers (based on the most popular fleet cars in the period 2011 to 2013) and then applies a 15% adjustment to reflect ‘real driving conditions’.  This mpg is then used with the average fuel costs provided by the Department for Energy and Climate Change and the AA.

So theoretically this all seems reasonable.  But what does it actually mean.

Using the current AFR rates and with Diesel at £1.20 per litre you need to achieve the following:

Picture 1 for AFR article

According to the AA, fuel prices have been dropping since August 2014.  With the exception of the highest rate, AFRs for Diesel cars have remained the same during this period.  Good news for drivers.

But if (when) fuel prices increase and if it takes HMRC 6 months to update the AFRs again what would be the impact?

If Diesel prices rise to £1.40 a litre and AFRs don’t rise by 2p per mile, drivers will need to achieve the following:

Picture 2 for AFR article

So, is the reliance on AFRs the right direction of travel for fleets and their business fuel policies?

In today’s world we increasingly expect things to be done instantly, but recent history has shown that the reaction time when it comes to changing AFRs in reaction to changing oil prices has not kept up with the expected pace of change.  This may have been good up until now, but may cause hardship and noise when pump prices start to rise again.

So, what can fleets do? Well, move to a system where the reimbursement is more aligned to real time costs, which could be from:

  • Using actual pence per mile (ppm) reimbursement
  • Fuel cards
  • Bunkered fuel
  • Using supermarkets
  • Vehicle choice

Each has its pro’s and con’s and needs to be considered carefully in the context of the business needs, HMRC compliance and practicality and may not be able to be done immediately.

For most, things will be ok for now, but even some drivers in a 1,900cc Diesel won’t be achieving an average 49mpg. So, are you ready for the next increase in pump prices?

Fleets need to review their fuel strategy, driver behaviours, vehicle maintenance and vehicle choice to ensure that they manage any ‘leakage’ from policy, employee demands and vehicle usage as HMRC can’t be relied upon to make changes to AFR quickly enough to avoid this burning platform!

If you would like to discuss any aspect of your fleet fuel policy, or any other aspect of fleet policy and how you can ensure that it is fit for purpose and whether there is ‘leakage’ that needs to be addressed please contact Nigel Morris on nigel.morris@uk.pwc.com.

 

For reference

HMRC Advisory Fuel Rates apply when a business either:

  • reimburse employees for business travel in their company cars
  • require employees to repay the cost of fuel used for private travel

If a business uses them correctly they will not need to apply for a dispensation to cover the payments and where they pay a rate per mile for business travel no higher than the advisory fuel rate, for the particular engine size and fuel type, HM Revenue and Customs (HMRC) will accept there is no taxable profit and no Class 1A National Insurance to pay.

If a business pays rates that are higher than the advisory rates and cannot demonstrate the fuel cost per mile is higher, there is a taxable profit that is earnings for tax and Class 1 National Insurance purposes.

The rates are updated quarterly to take account of changes in fuel prices and average miles per gallon of the most popular cars.

Source: http://pwc.blogs.com/midlands/2015/03/hr-matters-advisory-fuel-rates-the-right-direction-of-travel.html

 

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