Mark Sinclair's Blog: 8 July 2009 - Fuel rates row
08 July 2009
Her Majesty's Revenue and Customs is not an organisation to whose defence one springs lightly or readily.
HMRC is, after all, collectively "the taxman" and most of us begrudge the hard-earned income that it demands from us.
But the row sparked when it lowered its advisory fuel rate for drivers of diesel company cars, just as pump prices were going up, did make me feel that sometimes even the taxman can't win.
All of a sudden people were jumping up and down demanding that HMRC should change its system. Some even suggested that they should publish new rates every two months instead of twice a year - I mean, how much more red tape do we need?
This situation really calls from some perspective on the rates - which, don't forget, were introduced as a concession designed to save fleets the chore of having to calculate all their drivers' mileage expenses individually to ensure they weren't making any profit on their fuel claims.
It's interesting to compare HMRC's advisory rates with the actual cost of fuel over the past two years. For simplicity, and because 66% of company car drivers drive diesels, I'm only looking at diesel prices but the picture for petrol is much the same.
CHART: HMRC AFR vs 1.9 46mpg diesel
The chart is based on a 1.9 litre car doing 46pmg, which was the figure used by HMRC when calculating the current rate. Green bars mean the advisory rate is higher than the real cost of fuel - i.e. a driver who gets the full rate can charge more than he paid at the pumps. Red bars mean that fuel costs the driver more than he can claim tax free using the rate.
As you can see, during 2007 it was swings and roundabouts for the taxman and the driver, with not much more than half a penny per mile difference either way. Drivers lost out noticeably when pump prices soared in the first half of last year, but then HMRC raised the rate in mid year, just as fuel prices took a dive. This meant the average driver was 'in the money' for 11 straight months during which the official expenses rates exceeded actual fuel costs by up to 3p per mile.
That, of course, is my point. The advisory payments are not an 'official rate' but merely convenient option. They are a 'one size fits all' solution, which makes them at best a blunt instrument.
To show how blunt, here's last two years from the perspective of a driver who had the foresight to chose a 55mpg car in 2007 and the good fortune to work for a firm that paid the full advisory rate regardless of actual fuel consumption:
CHART: HMRC AFR vs 1.6 55mpg diesel
Definitely one very happy camper! He was in profit throughout the whole period, even at the height of the price spike. At best, he was getting nearly 5p per mile more than he actually paid for the fuel he used. Assuming he averaged 250 miles a week, the HMRC rate would have delivered a tax-free profit of £600 since the start of 2007.
'One size fits all' is another way of saying 'one size fits none'. Fuel prices have been increasingly volatile and the overall fuel consumption of fleet cars is improving rapidly. Any fixed pence-per-mile mileage rate is pretty much guaranteed to be wrong for most drivers, most of the time.
The best answer, in my view, is for fleets to use mileage capture systems. Not only does mileage capture allow the employer to pay drivers neither more nor less than they actually spend on fuel but it can also help to improve safety and reveal whether drivers and vehicles are being utilised efficiently. Mileage capture is also an excellent tool for monitoring and managing AMAPs payments to drivers of ECO or grey fleet cars.
It's certainly better than relying on the taxman to do a better job than the oil markets at guessing which way fuel prices will move in the next six months.