The UK's tax authority is under growing pressure to fundamentally reform its system for reimbursing business mileage, as companies struggle with what experts describe as an 'administrative nightmare' for petrol, diesel, and electric vehicle drivers.
The Core Problem with Current Rates
HMRC has been urged to make significant changes to its advisory fuel rates following concerns that the current system fails to accurately reflect real-world costs, particularly for electric vehicles. The Labour Party has confirmed it will update these rates again on December 1, highlighting the ongoing need for refinement.
Tim Rowlands, managing director of global EV solutions at expenses specialist Corpay, explained the fundamental issue to Autocar: "Electricity pricing is volatile and far more dependent on individual behaviour than petrol or diesel. Even with two tiers, a flat rate is still unsophisticated."
He emphasised that the current approach "doesn't account for the wide range of tariffs or real-world charging behaviour, which means it can feel unfair without solid data to back up how it's applied."
Practical Challenges for Businesses
The complexity creates significant operational headaches for companies managing vehicle fleets. "A lot of fleets are trying to avoid turning this into an admin nightmare," Rowlands noted.
While organisations can establish their own per-mile rates, Simon Doan, Deloitte UK's automotive tax director, issued a crucial warning about compliance requirements. "Employers will need evidence to prove the expense payments made do not exceed the cost incurred by employees," Mr Doan stated.
He detailed the extensive documentation needed: "This will need proof of electricity spend from all charging locations, as well as records of business and private mileage to calculate and evidence the costs for business journeys."
Recent Changes and Transition Period
The system has evolved significantly in recent times. Historically, quarterly approved per-mile rates offered three tiers for petrol and diesel vehicles based on engine size, while electric vehicles received a single Advisory Electric Rate since 2018.
HMRC recently introduced two separate AFRs for fully electric cars to better reflect the substantial cost differences between charging at home (generally cheaper) and using public chargers, particularly slow or fast chargers under 50 kW (more expensive).
This distinction aims to ensure reimbursements are fair, transparent, and aligned with actual costs while maintaining compliance and avoiding taxable benefit implications. For calculation purposes, plug-in hybrid and hybrid cars continue to be treated as petrol or diesel vehicles.
Companies have been reminded that the previous rates from 1 June 2025 can be used for up to one month from the date the new rates apply on December 1, meaning they remain valid until 1 October 2025 during the transition period.
