The company car driver
has remained reasonably unscathed through recent Budgets despite the constant expectation
of change. Even the Deputy Prime Minister’s long awaited White Paper “The New
Deal for Transport” devoted little more than half a page of its total 170 pages to
the company car.
The one change of any significance in 1998
is the Chancellor’s attack on employer provided free fuel, announced in the March
Budget.
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This left drivers faced with five years of
increases in scale charges at 20% over and above the usual increases in the pump prices
including fuel duty. The diesel scale charges are now brought in line with those for
petrol cars.
The following table shows the fuel scale
charges for the next few years assuming increases equal to those over the last 12 months:
To put this into perspective, a driver
paying 40% tax, taking free fuel, who has a 1,800cc car which achieves 34 mpg, will need
to drive the following private miles to make taking the free fuel worthwhile.
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By GlobalData
As the significant increases start to hit,
employers will be faced with employees requesting increased salary instead of fuel. This
will leave employers with some major thinking in trying to work out how much cash to give
as an alternative.
To illustrate the point, in the year
1998/99 John drives a 1,800cc car that achieves 32 mpg. Assuming fuel costs £2.96 per
gallon, and he drives 8,000 private miles per year, he will do the following calculation:
He is going to take the fuel since £228 or
£19 per month is a realistic benefit.
At the same time his employer will be doing
his sums and will calculate the following:
It must be nearly impossible for companies
to budget for their motoring costs when company car drivers have free fuel, since the free
fuel encourages private mileage. These calculations can therefore only ever be best
estimates.
If we move ahead to the year 2001/02 the
new fuel scale charges will really start to bite. If we assume John’s circumstances
stay the same how will his tax position change?
Therefore John should abandon taking the
free fuel, but will he demand something else instead? After all, he will feel it’s
not his fault that tax has increased. Plus, if his employer is saving money, where’s
his share?
So what is the employer’s position?
John’s employer will save even more
money than he did two years earlier. John may now say that his employer should give him
even more. This leads us to some important issues. When should employers offer an
alternative to free fuel, and how much should this be?
Because of the increases in fuel costs plus
the Class 1A NIC on the fuel scale charge benefit, employers may consider that the sooner
they stop giving fuel the better. However this is where the second question comes in. On
what basis should they calculate the substitution?
Should they:
- give the employees no extra salary; or
- give the employees enough salary to allow
them to purchase their own fuel and be no worse or better off; or- find a compromise position between the two.
It must be remembered that rarely will two
employees have the same circumstances. Private mileage, driving style, tax rate, engine
size and fuel consumption all vary. No matter how much effort is put into the
calculations, there will be winners and losers. Additionally, as stated above, these
calculations are, at best, estimates and they are very sensitive to small changes.
What is the extra salary required by John
so that he is no better or worse off?
* It is assumed the employer would not take
salary away from John!
Assuming the above figures, how much would
the employer save by leaving John no better or worse off?
By taking the saving per employee and
extrapolating it across the entire fleet it can be seen that the savings (or increased
costs) involved with fuel decisions can be very significant.
Obviously, as far as the employees stand,
there are going to be winners and losers. For many drivers free fuel is a major benefit.
How far does the company go towards compensating the obvious losers or does it take the
new scale charges as an opportunity to save money?
