The gap between HMRC’s Advisory Fuel Rates (AFR) and what drivers actually pay at the pump has become a persistent problem for UK fleets. While the government’s quarterly updates aim to reflect current fuel costs, the reality is that these rates often lag behind volatile market conditions, leaving employees out of pocket and employers navigating a system that was never designed for today’s fuel price environment. Here, we look at Advisory Fuel Rates vs Actual Cost reimbursement.
The Lag Problem
The fundamental issue is timing. AFRs are reviewed quarterly on 1st March, 1st June, 1st September and 1st December using data gathered before publication. This can hardly be blamed, let’s be clear, but when fuel prices spike between reviews, the rates quickly become unrepresentative.
This isn’t theoretical. In March 2022, AFRs were published just before diesel and petrol hit record highs. Within days, unleaded was 14% more expensive than the figure HMRC had used and diesel surged 19% higher. In essence, drivers claiming mileage at the published rates were immediately subsidising their employers as per Fleet News analysis.
Take the situation we found ourselves in now, too. AFRs remained unchanged as of 1st March for petrol and diesel, yet fuel prices soared on the back of the conflict in the Middle East. The average petrol price UK-wide currently stands at 158.1p per litre, with diesel at 191.3p per litre – a considerable jump to pump prices just a few months back.
Why Averages Don’t Work
Even when prices are relatively stable, the AFR system creates winners and losers. The rates are broad averages based on engine size bands, meaning a driver in a highly efficient vehicle within a band receives the same rate as someone in a less efficient model. TMC analysis can often find that identical cars driven by different employees achieved ranging actual costs due to driving styles (and a range of other factors), yet all three drivers would be reimbursed by the same AFR.
The AFR approach assumes that overpayments and underpayments across a fleet will cancel each other out. In practice, this is impossible to verify without capturing actual fuel data, which flat-rate systems don’t do.
The Case for Actual Cost Reimbursement
Actual cost fuel reimbursement calculates what each driver genuinely spent on fuel for business travel, using real price and consumption data rather than standardised assumptions.
The mechanics are straightforward. Fuel card transactions or scanned receipts provide the price per litre and volume purchased. A mileage capture system records business journeys. The two are combined to calculate precise pence-per-mile costs for each driver, and expenses are paid accordingly. TMC facilitate this, seamlessly!
Visibility
Flat-rate systems generate no usable data. Employers know only what they paid out, not what fuel actually cost or how efficiently it was used. Actual cost reimbursement produces granular management information such as real mpg figures, fuel volumes, prices paid and cost per mile by driver and vehicle. Patterns will emerge: perhaps a particular car type underperforms, or a driver’s consumption suggests the vehicle isn’t suited to their travel pattern.
Fairness
No one wins or loses based on arbitrary rate-setting. If pump prices rise, employees are reimbursed for the increase. If they fall, employers benefit. The system tracks reality rather than approximating it.
Compliance
HMRC has been known to scrutinise mileage records during investigations. Detailed, automated records of journeys linked to fuel purchases are far more defensible than handwritten claims calculated against a flat rate. Actual cost systems with built-in audit functions reduce the risk of errors and omissions that can trigger penalties.
Flexibility
While fuel cards are the cleanest data source, actual cost systems can also accept driver-submitted receipts. This allows companies without universal fuel card coverage to still move away from flat rates.
Addressing the Electric Vehicle Challenge
The introduction of separate home and public charging AFRs in 2025 acknowledged that EV reimbursement is more complex than a single rate can capture. Public charging can cost three times as much as home charging.
But the two-tier system still relies on drivers accurately apportioning their mileage between charging methods, and the rates remain averages that may not reflect any individual driver’s actual costs. Actual cost reimbursement sidesteps this by tracking what was genuinely spent, whether at home, at work, or on the public network.
When AFRs Still Make Sense
For small fleets with limited administrative capacity, AFRs offer simplicity. The rates are HMRC-approved, require no additional data capture and carry no tax liability when used correctly. If fuel prices are stable and vehicles are relatively consistent, the fluctuations may be tolerable.
But for larger fleets, high-mileage drivers, or organisations serious about cost control, the convenience of flat rates comes at a price: invisible overspend, unfair outcomes and little insight into one of the fleet’s largest variable costs.
Actual cost reimbursement eliminates the guesswork, treats employees fairly and gives employers the data they need to manage fuel spend effectively. For fleets ready to move beyond faith-based expenses, it’s the logical next step.
Truthfully, when comparing Advisory Fuel Rates vs Actual Cost on a whole, there are pros and cons. You should consider these before choosing the solution that suits.
