Feature – European Directive alters fuel funding

European directives on VAT claims on fuel are to be introduced in the UK. That will drive a switch to fuel and corporate credit cards, says Peter White

If you read nothing else, read this …

  • The European Court of Justice has made a ruling on how organisations can reclaim the VAT on fuel, but a date for the change in the UK has not yet been set.
  • This decision is expected to increase interest in fuel cards and corporate credit cards for company car drivers.
  • It is important to have a reporting process in place to ensure that drivers don’t claim for private fuel through a fuel or credit card.

Article in full

The issue of fuel for company car drivers is currently coursing through HR and fleet departments. A European decision to limit how employers can reclaim the VAT on fuel is being imposed on the UK, forcing many organisations to re-evaluate fuel purchase.

Currently, firms are able to reclaim VAT on all fuel bought by employees as long as there is a clear process to measure mileage and a fair mileage reimbursement rate.

However, the European Sixth Directive has stated that if employers are to continue to reclaim this indirect tax, it must be the employer that buys the fuel, not the employee.

HM Revenue & Customs estimates that a firm with 100 company cars, with drivers averaging 15,000 miles, will reclaim around £23,000 a year.

For this to continue, many firms must arm employees with either a corporate credit card or a fuel card. Credit cards, held in the employer’s name, should satisfy the European Court of Justice’s ruling as long as the card does not have a joint liability clause and the bill goes to the organisation.

An employer-provided fuel card, which allows company car drivers to fill up at a range of petrol stations, but also gives employers full transparency of purchases, should also satisfy these requirements.

Employee Benefits/Alphabet Fleet Research 2005 highlights that last year a quarter of UK organisations introduced fuel cards, despite only 1% planning to at the beginning of the year. This can be attributed to the proposed VAT change.

One of the most important things to watch out for when providing either a corporate credit card or a fuel card is that employees don’t siphon off private fuel as a result. Harvey Perkins, director of people services at KPMG, says: "It’s essential that through this process of continuing to recover the VAT, you can prove that you haven’t ended up paying for private fuel. The danger is if you don’t correctly identify all of the business mileage then you cannot prove to the Revenue that you have not paid for private mileage."

This process of recording and measuring how far staff drive on business, which should already be in place for health and safety reasons, is key to providing fuel cost-effectively.

Organisations should also encourage drivers to be miserly at the fuel pumps, regardless of whether they use a fuel card or a corporate credit card. Sean Bingham, director of new business at Bank of Scotland Vehicle Finance, says: "Get staff to fill up at supermarkets and avoid motorways. Incentivise them to fill up as cheaply as possible."

Adrian Waters, general manager of commercial sales at the AA, adds that the motoring organisation has seen a gradual shift away from corporate credit cards to fuel cards, which allow employers to operate in a slightly more controlled environment. "In smaller companies with less than 100 company cars, corporate credit cards are more unusual; they tend to [only] go to senior employees."

However, providing staff that are often away on business with a credit card can be an easier option because they can also be used for hotels and food. But Bingham adds: "At least there’s no Mars bars with a fuel card."

However, the timetable for changes has not yet been announced. KPMG’s Perkins suggests April 2006 could be a logical time. "HM Revenue & Customs wanted things to remain the way they were so it’s inevitable that the way the government writes the legislation, they’ll try and minimise the impact. Maybe they’ll find [a] way of relaxing the directive."