Blame car makers for fuel rate fault
28 November 2007
HMRC has clarified how it handles Advisory Fuel Rates, but the underlying problem with the system still exists, says Rupert Saunders
News that HMRC has formalised the way in which it will publish advisory fuel rates (AFRs) will be welcomed across the business car world. And let's face it, HMRC needs all the friends it can get right now.
Until now AFRs have been regarded with some suspicion, partly because of the haphazard way in which they appeared to be calculated and partly because of the lack of any formal timetable for review. Although HMRC did give at least one month's notice of any change, they were not widely publicised except by publications such as BusinessCar.
Above all, many business car drivers and several major fleet operators were convinced the old system left drivers out of pocket - effectively subsidising their employers for each business mile driven. And there is a danger that view will persist, despite the changes for the better.
Previously, AFRs were reviewed only in the event of at least a 10% variation in the fuel prices on which they were calculated. In a climate of rising fuel prices that meant many drivers could be out of pocket. On the other hand, if fuel prices fell (which they do on a cyclical basis) then drivers could be quids in.
The new system will review the rates twice a year and adjust them in the event of a 5% variation in fuel price. In theory this should mean the rates track prices more accurately, even though they will only be adjusted every six months.
“The new system will review the rates twice a year and adjust them in the event of a 5% variation in fuel price. In theory this should mean the rates track prices more accurately, even though they will only be adjusted every six months.”
But the underlying problem with AFRs is not the link to fuel prices; it's the car makers' fuel economy figures, which are also used as a basis for the calculation. And, as I've argued before, this is not HMRC's fault.
In fact, as I've just discovered, HMRC takes a very pragmatic approach to fuel economy and actually adjusts the figures downwards by 10% in its calculations to take account of real driving conditions. So, while the official average consumption of petrol cars in the 1400cc to 2000cc band is 38.5mpg, the figure used by HMRC for AFR purposes is actually 34.7mpg.
Yes, you could argue the band is too wide (particularly when all diesels up to 2000cc are lumped together), but the underlying problem here is the unrealistic fuel consumption figures quoted by the carmakers, not the method of calculation.
Of course, these are the self-same figures that reduce a driver's benefit-in-kind liability and, while I have not done the calculation, I suspect the reduction in personal tax from artificially low fuel consumption far outweighs the penalty from unrealistic AFRs.
Either way, the next time a driver comes bleating about subsidising company fuel costs, it's worth reminding them that the answer lies, as always, under the right foot.