Tax Rates

Using HMRC rates to your advantage

June 30, 2023

This month the TAG Accountants Group's tax advisors look at the tax saving opportunities from beneficial loans and reimbursement of fuel costs for employees

Opportunities to put a bit more money in your pocket!

Here at TAG Accountants, we like to focus on helping our clients to reduce their costs, especially tax, to a minimum, obviously within the rules! This month we are focusing on a couple of areas where there may be opportunities to put a bit more money in yours and/or your employees’ pockets by following some prudent tax advice.

Save on borrowing costs by using beneficial loans

As directors/shareholders in a business, we sometimes have a personal need for some short-term financing. There is always the option of taking a personal loan with a High Street lender, but this is now becoming progressively more expensive as the UK base rate rises, especially for unsecured borrowing.

If your business has some excess cash in it, you could consider taking a loan from the company as an alternative which, as we shall see, could be an extremely cost-effective way of dealing with your financing requirement, albeit you need to be fully aware of potential consequences.

Please note that HMRC has announced that on 6th April 2023, its official rate of interest will be increasing from 2% to 2.25%. This rate of interest is used to calculate the income tax charge on the benefit of employment-related loans and the taxable benefit of some employment-related living accommodation. These rates used to fluctuate regularly in line with the base rate, but in recent years HMRC has fixed the rate for the whole tax year.

The HMRC rate of interest on beneficial loans now looks extremely attractive compared to the Bank of England Base rate of 5% and the much higher rates charged by banks for say unsecured loans.

This means that if interest is paid to the company for monies borrowed at the official rate, then no benefit in kind arises on the borrower (director and/or shareholder of the business) and they would only pay 2.25% in interest, well below High Street rates.

There is even the option of borrowing on an interest free basis, but, if the amount borrowed exceeds £10,000, then a benefit in kind will arise equivalent to the interest calculated using the official HMRC rate – this would need to be included on a P11D form that is submitted annually to HMRC and will be subject to income tax on the borrower and employers’ NIC on the company.

Either way, the cost to the borrower will be far less than using external funding and so is worth considering.

Inevitably there are other issues to consider if you decide to take this approach:

  • The loan cannot result in leaving the company in financial difficulty as this leaves the borrower exposed to retribution if the company fails because of making the loan.
  • If the loan is not repaid within 9 months of the company’s year-end in which the loan is taken out, then the company will be subject to a special tax charge (33.75% of the amount still unpaid after 9 months) which can be recovered from HMRC once the loan has been repaid. By taking the loan at the start of the company’s accounting period, you have 21 months to repay it before it creates a tax liability for the company.
  • There are anti-avoidance rules to counteract the situation where the loan is re-advanced by the company e.g., repaid after 9 months of year-end but then drawn down again the following month. The anti-avoidance should not apply where the loan is cleared by crediting a bonus or dividend to clear the balance.
  • Writing off or waiving the loan rather than it being re-paid will create an income distribution (effectively a dividend) to the borrower, which would be taxable. 
  • If the loan exceeds £10,000 and the interest paid is below HMRC official rate, then a benefit in kind arises as noted above
  • The loan will need to be disclosed in your annual accounts and could, depending on its quantum, be looked at negatively by lenders/customers/suppliers.

So, in summary, using this as a form of financing can be a cost-effective option in some circumstances and we would be happy to discuss this further if you wish to explore it.

Reimbursement of fuel costs for employees

When it comes to fuel costs on vehicles, there are various options available for reimbursing employees and it is important to consider which option is the most effective from a tax point of view, as the difference it can make could be substantial.

For employees who do not have a company vehicle, there are basically 2 options – pay a flat rate per mile for business miles incurred (HMRC allow up to 45p per mile for the first 10,000 miles each year and 25p thereafter on which there is no tax to pay) or provide them with a fuel card to use where they will be taxed on the fuel cost relating to any private mileage unless they reimburse the company for it using the advisory HMRC rates. 

If you pay a flat rate for business mileage below HMRC rate, the employee can claim a tax deduction for the difference between the rate paid and the HMRC rate. If you pay above the HMRC rate, the excess is taxable on the employee. The HMRC rate is supposed to incorporate all the costs of running the car i.e., fuel, wear and tear, insurance, etc. – despite the significant rise in the price of fuel in recent times, the rate has not been increased.

Remember that, provided the employee provides a fuel receipt from the filling station the employer can reclaim input VAT on a portion of the amount reimbursed to the employee. This input VAT is one sixth of the advisory fuel rate for the employee’s vehicle, e.g., for a 2200cc diesel car, the input VAT would be 3.3p per mile based on 20p.

For employees who have a company vehicle, there also basically two options – firstly the employee fuels the vehicle at their expense and recharges any business mileage back at the HMRC advisory rates (see below – note these are published quarterly by HMRC):

Engine SizePetrolDieselLPG
1400cc or less13p
1600cc or less
12p (13p)
1401cc to 2000cc15p
12p (11p)
1601 to 2000cc
14p (15p)
Over 2000cc23p18p (20p)18p (17p)

Please note, previous rates are shown in brackets and that for fully electric vehicles, the rate is 9p (8p) per mile

Alternatively, the employer can pay for the fuel used in the car (e.g., via a fuel card), in which case, there is a benefit in kind to report on the employee’s P11D to cover off the private mileage that the employer has paid for. The benefit in kind is based on a notional vehicle list price of £25,300 for 2022/23and applies irrespective of the actual original list price of the vehicle. That figure is then multiplied by the CO2/km percentage for the actual vehicle to arrive at the benefit in kind charge.

For a vehicle with CO2/km emissions of 168g/kg, this would mean the car fuel benefit would be 37% of £25,300 i.e., £9,361. So, if the employee is a 40p taxpayer this amounts to tax to pay of £3,744 and the employer to pay NICs of £1,360 on the benefit in kind. The tax on the employee is equivalent to £72 per week and so, if the employee uses less fuel than this for private mileage, then the fuel benefit option is uneconomical, and they could be better off fuelling the car themselves and recharging business mileage at the approved rate.

In summary, it is worth looking into the best options for employees whether provided with a company car or not, remembering that the decision also has cost implications for the employer where a benefit in kind arises.

Cars for business are always a contentious area so do not be afraid to ask advice in advance of putting arrangements in place.

Tax advice from TAG Accountants can help you and your employees save money

Both areas provide scope to make tax savings for you and potentially your employees so if you need assistance with anything raised above and/or just want help making the most tax effective decision in all the circumstances, please speak with one of our friendly experts here at TAG Accountants Ltd in complete confidence on 01902 783172 or alternatively, just click HERE to contact us via our website.

We look forward to hearing from you.