Business mileage allowances for petrol and diesel cars have been available for decades. They make it easy for employers to reimburse employees for their company car fuel expenses.
If you’re a fleet manager or you work in HR, reward or finance, you’ll know the petrol and diesel rates off by heart. But what happens when someone with an electric car claims? Or you decide to introduce electric vehicles to your fleet? What electric car business allowance should you use then?
Our question and answer article tells you everything you need to know.
Q - What are the electric car business allowances?
A - There’s a new advisory fuel rate for electric-only vehicles
With electric vehicles becoming a more practical choice for company fleets, the lack of clarity over electric car mileage allowances has made life difficult for employers and employees.
That’s why the ACFO, the fleet decision-maker’s organisation, has been putting pressure on HMRC to provide companies with a new electric car mileage rate. HMRC obliged and issued a new electric car business allowance called the advisory electric rate (AER).
From 1st September 2018, employees driving on business in a pure electric company car can claim 4p per mile. And when employees drive their company car on private journeys, they will use the AER to repay the cost of electricity at 4p per mile.
As with the equivalent petrol and diesel advisory fuel rates (AFRs), the AER is not deemed to provide any profit. Which means it’s free from tax and class 1 national insurance.
Like the petrol and diesel car mileage allowances, the AER will be reviewed and published quarterly on HMRC’s website.
Q - How was the figure of 4p per mile arrived at?
A - It’s all thanks to industry leaders
In 2017, ACFO (a body representing fleet decision-makers) held a fleet industry summit for officials from a range of motor associations and companies. They called on HMRC to publish advisory car mileage allowances for electric, plug-in hybrid and range extended vehicles.
The ACFO submitted suggested reimbursement rates to HMRC supported by related calculations and backed up by a petition from fleet managers.
HMRC listened to their recommendations and decided to adopt the suggested business mileage allowance for pure electric vehicles only.
Q - Can your business deviate from this figure?
A - Yes, but you’ll only avoid tax in certain circumstances
In the same way that firms can adopt their own petrol or diesel rates to better reflect their fleet circumstances, the AER amount can be adjusted. For example, if your company cars are highly efficient you can reduce your business mileage allowance. Or, if the cost of travel is higher than the guideline rate, you could increase it.
However, to avoid paying tax and class 1 national insurance contributions, you would need to be able to demonstrate the reason for your adjustment. If this isn’t possible, rates claimed above HMRC’s specified AFR will be treated as taxable profit incurring class 1 national insurance.
Q - What about privately owned electric cars?
A - They’re still subject to approved mileage allowance payments (AMAP) rates
If any of your employees use their personal electric-only car for business journeys, they will still need to claim business mileage allowances using the diesel and petrol AMAP rates. These rates are higher as they also include vehicle wear and tear. They remain at 45p per mile tax free for the first 10,000 business miles reducing to 25p per mile thereafter.
Q - Which car mileage allowance rates should apply to hybrids?
A - Use the relevant petrol or diesel figure
Although HMRC agreed to adopt the AER for fully electric vehicles it didn’t accept any changes for hybrids. Hybrid or range-extender company cars will have the appropriate HMRC rates applied depending on whether they’re diesel or petrol.
Q - What does this mean for employees?
A - It depends on your approach so far...
If you’ve been reimbursing employees with electric company cars in line with petrol or diesel rates, you’ll need to give them notice of the reduction from 1st September 2018.
You may also need to check whether you’ve paid tax on any expenses claimed at the higher rate after this date as they could be classed as profit.
If you’ve not been reimbursing electric company car drivers, you might decide to request claims and back date any business mileage requests to 1st September 2018.
With electric car business allowances now clear, it’s easier than ever for your organisation to add electric company cars to your list. And reap the rewards of significantly lower business mileage allowances.