HMRC has recently announced new Advisory Fuel Rates (AFRs) that took effect from 1 June 2024.
AFR’s are only used in the following circumstances:
- When the employer needs to reimburse an employee for business travel in a company car, where the employee has paid for the fuel personally.
- When an employee needs to reimburse the employer for private miles travelled in a company car, where the employer pays for the fuel (i.e. to avoid the fuel benefit applying).
The changes include a reduction in the Advisory Electric Rate (AER) for electric vehicles.
Due to tax efficiency, many businesses have invested in electric fleets. The reduction in the AER therefore presents a dilemma for business owners.
Should you reduce your rates in line with the AER or stick with your current rates? Here’s everything you need to know.
Key changes in the AFRs
The new AFRs from 1 June 2024 are:
- Electric vehicles: The AER has been reduced from 9 pence per mile (ppm) to 8ppm. This rate is intended to cover the cost of electricity used for business travel by electric company car drivers.
- Petrol: Rates have increased by 1ppm to 16 pence per mile for engine sizes from 1401 up to 2,000cc, and by 2ppm to 26 pence per mile for engines over 2,000cc.
- Diesel: Rates have increased by 1ppm across all engine sizes. For example, this means it is now 15 pence per mile for engine sizes from 1601 up to 2,000cc and 20 pence per mile for engines over 2,000cc.
- Hybrid: Rates for hybrid cars are treated as either petrol or diesel cars for Advisory Fuel Rates
- LPG vehicles: Rates remain unchanged across all engine sizes.
HMRC reviews all AFRs quarterly on:
- 1 March
- 1 June
- 1 September
- 1 December
How does the AER calculation work?
In essence, the AER is derived from data on electricity costs and vehicle consumption rates.
The Department for Energy Security and Net Zero (DESNZ) provides an annual “pence per kilowatt hour” cost, which is then adjusted quarterly by the Office for National Statistics (ONS) Consumer Prices Index for electricity.
This data is combined with vehicle-specific electricity consumption rates and business car sales data to calculate a weighted average cost per mile for fully electric cars.
The Association of Fleet Professionals (AFP) suggests having different rates based on access to home charging and vehicle type (cars versus vans) which could provide a more accurate reflection of actual costs.
Responding to the changes
It is important to review how the new AER compares to the actual costs incurred by your employees for charging their electric vehicles.
If the new rate falls short, consider whether this might lead to dissatisfaction or financial strain for your employees.
Although HMRC sets the advisory rates, businesses can set their own reimbursement rates.
If the new AER does not cover the ‘true costs’, you might want to consider offering a higher reimbursement rate to ensure employees are not out of pocket. To do this, you will need to demonstrate that the actual fuel cost per mile is higher to prevent tax implications arising.
We can provide tailored advice to ensure your reimbursement policies meet both regulatory requirements and the needs of your employees.
For more information, or guidance based on your unique circumstances, please get in touch.
