Chancellor of the Exchequer Gordon Brown last invited views on restructuring the fuel scale charge - the Government scheme for calculating the personal tax due from a driver receiving free fuel.
This charge is currently based on the engine size and fuel type of the driver's company car, but the Treasury has revealed it will seek views on restructuring the fuel scale charge to relate it to carbon dioxide emissions.
In 1998, the Government announced its intention to discourage employers giving staff free fuel for private use in a company car, and has sharply increased the fuel scale charge to the point where many drivers now pay more in tax than they receive in free fuel. As a result, many employers have examined the opportunity to buy company car drivers out of this benefit, a plan that can leave both employer and driver substantially better off.
For example, a driver with a 2.0-litre petrol powered company car would face an annual fuel scale charge of £2,460. For a higher rate tax payer this equates to a tax bill of £984 (40 per cent x £2,460).
Assuming the driver covers 10,000 private miles a year at an average 30mpg and a fuel price of £3.20 per gallon, the value of the fuel is £1,065 (10,000/30 x £3.20). Overall, therefore, the driver is £81.60 better off accepting free fuel.
But the employer also faces charges - £879 to buy the fuel (£1,065 net of VAT), £183 in VAT according to an official scale, and £293 in National Insurance Contributions, coming to a grand total of £1,355.
This means that the provision of 'free' fuel has cost a total of £2,339 (£984 + £1,355) to deliver £81.60 worth of benefit to the employee.
Adrian Stevenson, a senior consultant with KPMG, said offering the driver £500 in lieu of the free fuel would leave the employee £300 better off after tax - substantially ahead of the £81.60 the fuel is worth - and cost the employer £560 including NI. As a result, both parties could be better off while still delivering savings of £795 to the employer.
The danger to fleet budgets is that this type of buy-out initiative will stall as companies await the Chancellor's deliberations on switching to a fuel scale charge based on CO2 emissions.
Alastair Kendrick, from Ernst & Young, said: 'Making this announcement at this time is not helpful, because the promise of a consultation document will make some employers put their plans to deal with the issue on ice.'