Petrol price increase: How does it impact SMEs?

The UK petrol price hit an all-time high of £191.05p on Sunday, data from Experian Catalyst shows.

That takes the cost of filling a typical 55-litre family car to £105, up from around £72 a year ago.

Rates have been steadily growing alongside inflation for some time, as indicated by a recent shortage that saw long queues of panic-buying consumers at petrol stations across the country.

Fuel is already a major expense for many small firms that rely on business vehicles to deliver products or services. As the cost accumulates, UK SMEs are likely to be under further pressure in an already tight economic landscape.

However, taking a smart approach to the fuel crisis could enable you to reduce spend, and even trigger innovations that might improve your existing business practices.

We spoke to fuel experts to find out more about the rise in petrol costs, and how small businesses could adapt to lessen its effects.

Why are petrol prices increasing?

Today’s business climate has created a perfect storm of challenges that SMEs are attempting to weather, meaning there’s no singular reason for why petrol prices are rising.

Perhaps the biggest contributor is the current shortage of HGV drivers, which has created challenges with delivering fuel. Analysts are placing equal blame for this issue on the impact of the pandemic, as well as immigration issues caused by Brexit.

However, there are also global factors influencing prices, such as the recent Hurricane Ida in North America that has impacted the fuel supply chain.

World oil supplies slid at the start of the pandemic, as national lockdowns saw road traffic numbers dramatically decrease, and energy usage fall. As economies have begun to reopen, the demand has now returned. Towards the end of September, the Petrol Retailers Association (PRA) reported between 50% and 90% of pumps were dry in some areas of the country.

Levels have since returned to normal and fuel is once again freely available. However, the government has also put the army on standby to help ease supply problems as a precautionary measure.

Will petrol costs continue to increase?

Experts are warning that despite the current high levels of petrol fees, they will continue to rise even further as retailers pass the wholesale price hike on to consumers.

How will it impact small businesses?

Small business operators must navigate a variety of challenges during periods of higher petrol prices. They can impact business priorities such as supply and overhead expenses, service territories, staffing, and the pricing of products and services.

Of course, the most directly affected companies will be those who are involved in delivery and transportation, as petrol costs will be one of your biggest expenses.

But even if you don’t own and operate company vehicles directly, you’ll still likely be hit by higher pricing thanks to its effect on the supply chain. If you have vendors or suppliers that transport goods for your service, then the increased costs will likely be passed on to you.

Pricing

As fuel costs are expected to rise over a long period, eventually SMEs will find themselves under pressure to pass costs on to its customers. Whether or not you can afford to do so, without affecting your consumer base, depends on the industry and the competition around you.

Staffing

If your overheads become unaffordable, one area where small firms are likely to see a change is staffing levels. If expenditures become too high, this could affect your workforce – resulting in reduced hours for staff members, or even redundancies.

If your company makes use of business vehicles, such as delivery or courier services, now is a particularly important time for you to stay knowledgeable about your finances. Speak to a financial advisor, or make use of online software, to remain on top of budgeting.

How can SMEs reduce the impact of higher petrol costs?

Consider outsourcing

If you currently use vehicles as part of your business practice – whether delivering or picking up services – it might be a good idea to partner with a company that already has the benefit of scale and resources to handle your petrol costs.

This option is also a good way to help you save on other associated expenses, such as vehicle maintenance payments and insurance.

Of course, if this isn’t possible – or irrelevant to the way your business operates – then you can also speak directly with your suppliers or customers, and try to negotiate better rates to help you absorb the increased cost of fuel.

Adopt conscious driving habits and vehicle maintenance

Educate your employees on the bad driving habits that can increase fuel consumption, such as fast acceleration, driving in low gears, heavy braking, speeding, and revving. Behavioural changes like these might seem small, but they can go a long way towards minimising costs.

You should also reassess your travel requirements and routes, using data to your advantage. Tracking apps can act as a fuel log to monitor your petrol-related expenses, helping you to optimise and save costs by creating detailed cost statistics and summaries.

Avoid travelling where possible

An obvious measure you can take to reduce the impact of higher petrol costs on cash flow is to reduce travel as much as possible.

COVID-19 has proven that most meetings can be hosted on Zoom and Microsoft Teams, so ensure you are. If you can introduce a remote working solution to your employees, and enable them to work without travelling for a few days a week, this is also worth considering.

What government help is available?

As a small business, you can claim a tax deduction for all business-related vehicles you use for work (personal vehicles are classed as anything you use for travelling to and from work). This covers not just cars, but also motorcycles, vans and even bicycles.

Government support can’t be claimed directly for fuel costs, but is a great way to allay the impact of higher petrol prices.

How much can you claim?

How much you can claim depends on whether you’re using a vehicle that’s been:

• That you’ve bought or leased with your own money
• Owned or leased by your employer (a company vehicle)

Employees use their own car

If your employees use their own vehicle or vehicles for work, encourage them to claim tax relief on the approved mileage rate. This is done as a deduction on income, and covers the cost of owning and running their vehicle. It does not include claims on fuel, electricity, repairs, MOT or road tax.

The amount they can claim for this relief is called an Approved Mileage Rate (AMR) and it’s claimable per business mile. The rates are outlined below:

To work out how much your employees can claim for each tax year they’ll need to:

• Keep records of the dates and mileage of work journeys
• Add up the mileage for each vehicle type used for work
• Take away any amount you pay you towards their costs, (sometimes called a ‘mileage allowance’)

Employees use company cars

If your employees use company cars as part of their contract, they can also claim tax relief, known as an Approved Mileage Allowance Payment (AMAP) on any petrol or electricity costs. They’ll just need to provide receipts to show evidence of the money spent.

You can choose to pay or reimburse your employees for AMAP on a tax- and NIC-free basis – rates are the same as for AMR, and are outlined in the section above. However, if this is unaffordable, you can also ask employees to claim tax relief for the unused balance of the approved amount.

Should you be investing in green vehicles?

The government recently ended its EV grant scheme which pledged a maximum of £2,500 for people wanting to purchase an electric vehicle.

However, the running costs are still considerable. A year’s petrol or diesel typically costs well over £1,000, but if you can charge an electric car at your home overnight the annual fuel cost can be under £150.

It’s because of this that sales of fully electric cars have increased from less than 1,000 in 2011 to almost 100,000 in the first 5 months of 2022 alone.

Conclusion

Small businesses regularly need to contend with fluctuating petrol costs. Given the current record-high prices, however, SMEs should make use of accounting experts or software to monitor finances such as overheads, and the pricing of goods and services.

But from the uncertainty, comes opportunity. Now is a good time for small businesses to adapt to being less reliant on fuel long-term. Take advantage of government backing, and invest in more sustainable, electric vehicles and couriers, to lessen the consequences of a future price rise.