SME owners should check that they – and their company car drivers - are paying the correct cost for their private mileage. Otherwise there is a risk of HMRC pursuing them for free fuel benefit.

The Advisory Fuel Rates (AFR) – a rate for repaying business mileage, or private mileage incurred in company cars - changed at the beginning of March, following HM Revenue & Customs (HMRC) recognition of the increasing cost of fuel.

However, the change was outside the usual six monthly change period, and accountancy firm UHY Hacker Young Associates believes company car drivers might accidentally be caught out.

"If you have been repaying less for private mileage than the HMRC official rates, HMRC's view is that fuel for private travel is provided by the employer and therefore the car driver is taxed on the fuel benefit scale charge," warns UHY's Mike Crellin.

"This is, of course, unless you meet the cost of all fuel used privately. In the past when rates have changed HMRC have said they would not pursue this line but no such reassurance has been given for some time. There is, therefore, a risk that company car drivers who might have paid a few pence less for their private travel than the official rate will be taxed on the full fuel scale benefit. This could add up to £2,500 to your annual tax bill. Employers would also be hit with extra Employer National Insurance on the fuel benefit," adds Mr Crellin.

The AFRs increased in March in every case – except for diesel engines below 1400cc engine size.

Advisory Fuel Rates from March 2011

Engine size

• 1400cc or less: 14p (petrol); 13p (diesel); 10p (LPG)
• 1401cc to 2000cc: 16p (petrol); 13p (diesel); 12p (LPG)
• Over 2000cc: 23p (petrol); 16p (diesel); 17p (LPG)

Author Ralph Morton is editor & publisher of Business Car Manager magazine (www.businesscarmanager.co.uk). He was named Business Writer of the Year in the Guild of Motoring Writers Awards and can be contacted at editor@businesscarmanager.co.uk