As the Government prepares for major changes to the way the perk is taxed, companies must rethink their approach to paying for employees private fuel costs. The warning comes from Alastair Kendrick, director of PAYE with leading tax advisers Ernst & Young.
From April, tax on the perk of free fuel will no longer be based on engine size and fuel type, but instead will mirror the new company car tax system and focus on carbon dioxide emissions.
The benefit of free fuel is given a nominal value – £14,400 for 2003/2004. Drivers pay tax on a percentage of this value according to the CO2 emissions of their vehicles, based on current company car tax rates.
This requires a rethink of who gets free fuel and whether to provide the benefit at all, according to Kendrick.
For example, a 1.8-litre car emitting 165g/km of CO2 will attract a fuel scale charge of £2,448 (17% x £14,400) in 2003/04, compared to £2,850 in 2002/03.
Kendrick said: 'The winners, as with the car tax regime, will be those who drive low emission vehicles.
'However, employers pay a wide range of taxes on this benefit and the company's cost of provision is often out of all proportion to the benefit in the employee's pocket.
'Fundamentally, in choosing to provide fully-funded private fuel, the company is effectively offering the employee a blank cheque. This is the only employee benefit with a truly uncapped nature. Not only does the business have no control over the level of private mileage fuel costs each employee incurs, but free fuel can encourage a culture of car use.'
Kendrick added that under the new rules, buying employees out of free fuel during the year is made easier, which may encourage employers to scrap the benefit.