A common practice amongst employees is to provide all company car drivers with a fuel card, or to reimburse all fuel paid by other means. To avoid a private fuel scale charge the cost of private fuel is either reimbursed by the employee, or deducted monthly from net salary through the payroll.
A recent tax case (Impact Foiling v HMRC) has thrown this practice into some confusion, particularly with reference to the income tax year end.
Because of the inevitable delay in recovering amounts relating to private fuel in each month, when it comes to year-end, it is quite normal for the ‘balance’ of the tax year’s private mileage to be recovered in the following income tax year. For example, private mileage carried out in March will be recovered in the April payroll or expenses run (that is to say, some pre 5 April expenses will be recovered post 5 April).
The strict letter of the law relating to private fuel is that the amount must be recovered in the year it was provided in order to avoid the fuel scale charge. That being said, HMRC has historically recognised the impracticalities of this piece of legislation, and offered a concession (in EIM 23782) to the effect that payments were treated as made within the year if they were made without unreasonable delay after the end of the year, or were within 30 days of the discovery of an “unintentional error”.
The Impact Foiling case focussed on such an error and, despite reimbursing the company the private mileage within the time period, HMRC pressed the employer for the unpaid tax and Class 1A NIC on the fuel scale charge, on the basis that the reimbursement was made post 5 April. The company appealed against this and the appeal was heard by the Special Commissioners.
The Special Commissioner presiding stated that, despite the administrative concessions summarised in EIM 23782 being “extremely sensible”, he could only apply the law – that being that the reimbursement had been made after the end of the tax year in which the fuel had been provided.
So what does this mean?
Technically, any making good relating to 2006/07 that occurs post 5 April 2007 is likely to result in a company car fuel scale charge for 2006/07. Whilst this had never been the intended application of the rules in this area, the strict technical application appears to leave little room for manoeuvre.
It is possible that an HMRC Statement of Practice may be made about this as there are many problems that are likely to arise as a result of this judgement.
Until then though, steps should be taken to ensure that, come 5 April 2007, all private fuel costs incurred by employees who would normally not have a private fuel scale charge are recovered by the company by that date.
The consequences of not doing this could be significant.
This page was last updated on Friday, January 04, 2008.
