The tax year 2002/2003 sees the end of the five-year programme to increase the fuel scale charge by 20% over the usual increases in pump prices each year. Due to a fall in pump prices over the year, the rise in fuel scale charges for 2002/2003 is only 16%.
The scale charges are shown below.
In the 2002 Budget, the Chancellor announced plans to introduce a new system of taxing free fuel from April 6 , 2003. The new system will be based on the carbon dioxide emissions of the car, using the same percentage graduations, including discounts and premiums, as used in the company car tax system. The percentages, which will range between 15% and 35% (although this will be less for electric cars, hybrids, etc), will then be applied to a fixed number.
The example clearly shows that for 2002/2003, it is a no brainer for the employee to reject free fuel. The obvious question is whether as from April 6, 2003 the new system will result in a similar conclusion.
The Government has not yet confirmed the fixed number to which the percentage will be applied and it is therefore not possible to give an exact answer.
However, the Government has stated that the new system will be revenue-neutral and is intended to make the system more environmentally friendly than previously.
It is therefore reasonable to assume that there will still be the same range of tax liabilities as now, but split into 21 different bands. As there is some correlation between engine capacity and CO2 emissions, it follows therefore that generally, the larger the engine the higher the emissions and the greater the tax charge under the new system.
It is therefore probable that a normal employee who should not accept free fuel for 2002/2003 is unlikely to be in a position to accept free fuel under the new rules in 2003/2004.
There are of course exceptions to every rule, and in this case there may be some cases where the decision to accept free fuel is close. This would be the case for example for an employee with a diesel car with an engine size slightly over 2000cc.
At present the employee will have the highest tax charge if he/she accepts free fuel. If, however, that employee's car had CO2 emissions of, say, 190g/km this would give a percentage of 25% (including the 3% diesel surcharge) for 2003/2004.
Although the fixed rate has not been announced, the 25% rate is the middle rate and, with all things being equal, will attract a smaller tax liability than previously. Note that it still may be cheaper to buy the fuel privately. There are several factors to be taken into account when deciding whether or not accepting free fuel will be tax efficient:
The Government has not changed its view on the provision of free private fuel. It is still actively seeking to tax free private fuel out of existence.
Although there may be some exceptions, it is likely that few employees should be accepting free fuel this year or next.'
Fuel scale charge 2002/2003
2001/2002
Petrol - diesel
Engine size cc
0-1,400: £1,930 £2,460
1,401-2,000: £2,460 £2,460
2,001+: £3,620 £3,620
2002/03
Petrol - diesel
Engine size (cc):
0-1,400: £2,240 £2,850
1,401 – 2,000: £2,850 £2,850
2,001+: £4,200 £4,200
Example
An employee has a car with a petrol engine with a capacity of between 1,401 and 2,000cc. The car's fuel consumption is 33mpg and the employee, who is a higher rate taxpayer, travels 8,000 private miles.
Assuming a gallon of petrol costs £3.27 (72p per litre) then to purchase the fuel privately would cost the employee £793. If the employee were to accept free fuel the additional tax payable would be £1,140 (£2,850 x 40%). Clearly the employee would be foolish to accept the free fuel.
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