Mainly because its tax efficiency has reduced and it seldom provides an actual benefit for the employee. Equally it represents a significant expense for the employer.

From an employee's perspective, the BIK tax is likely to exceed the actual value of the fuel cost for private use unless private mileage is significant (usually in excess of 12,000 miles per annum for a higher rate taxpayer). The fuel benefit charge multiplier for private fuel provided for company cars is £18,000 for 2010/11. The taxable benefit is calculated by applying the appropriate percentage, as per the calculation for the company car BIK, to £18,000 for 2010/11.

From the employer's perspective, not only does he have to pay the cost of the private element of the fuel, but also pay employer's National Insurance Contributions (NIC) which is currently 12.8% of the taxable benefit. Additionally, it must account for output VAT on the cost of private fuel, via the VAT scale charge, the cost of which is dependent upon the CO2 of the vehicle. When considering the actual costs associated with the free fuel provision a worked example can easily demonstrate the cost of this 'benefit':

The example below demonstrates that the provision of free fuel is a very expensive benefit to offer.

* The cost of private fuel would need to exceed this level to make provision of free fuel worthwhile from an employee's perspective.
** the employer would also have to pay the additional fuel cost for the private mileage.

For employees who do not have a company vehicle, but use their own vehicle for business use, they will usually only be reimbursed by their employer for any business mileage carried out.

However in some Personal Contract Purchase and Employee Car Ownership schemes the employees may still have all their fuel paid for. In this instance the employees will need to keep careful records of their business and private mileage, and their fuel costs. They will then be taxed at their marginal income tax rate on the actual value of the fuel that they have received for private use. Therefore if their private fuel element value was £1,200 the tax payable for a 20% tax payer would be £240 or £480 for a 40% tax payer.

The tax rules relating to private fuel for commercial vehicles allow employees to take commercial vehicles home at night without a private fuel tax charge. Therefore an employee's home to work commute is deemed not to be the traditionally defined "private mileage". If however the employees carry out significant private use of the commercial vehicle (as clearly defined by HMRC - details of which are available at www.hmrc.gov.uk which is outside of the daily commute, there is a flat rate charge of £550 per annum for private fuel subject to the employee's rate of income tax. Therefore a 20% tax payer would be charged £110 per annum for the free fuel (a 40% tax payer would pay £220).

Again the employer would also be charged Class 1A NIC on this BIK tax which would amount to £70.40 (12.8% of £550).

The diminishing benefit of free fuel for private use

Many employers have actively removed the benefit of free private fuel and the following are methods that can be used to remove the benefit. It is important to consider the potential cost saving against the impact on the employees' benefits, and therefore determine the most suitable method to be adopted.

1. Voluntary surrender of free fuel

A communication programme, outlining the cost impact to employees will often encourage a significant number to opt out of their own accord. With the significant rate increase in April 2010 from £16,900 to £18,000 there is an opportunity to demonstrate the increasing cost of this benefit to employees.

2. Exclude new starters

The removal of the benefit to all new starters is a simple method, however its effectiveness is dependent on staff turnover and hence can take time. There will often be a 'hard core' of long service employees who will remain untouched by the new starter policy.

3. Buy out

Buying out private fuel for existing employees can be very effective. This will usually be a one-off, non-pensionable payment. Setting the payment level is an important consideration, in order to ensure that employees deem it fair. However consideration of the tax cost of free fuel to the employee often means the buy out does not have to be a very significant sum.

4. Withdrawal of free fuel

A further option is to identify a future date beyond which no employees will receive free fuel for private use. This will potentially achieve the greatest cost saving (albeit the benefit is deferred), but may be seen by employees as an erosion of benefits and result in staff dissatisfaction.