Business mileage: don’t stall over VAT fuel recovery
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For many business owners, motoring costs represent a significant proportion of their firm’s expenditure. As fuel prices climb to unprecedented levels, reclaiming VAT on car fuel is an ideal way to recover some of these draining costs. However, it is imperative that this process is carried out correctly as this is often one of the first areas that a VAT inspector will study when reviewing your accounting records.
If you pay a mileage allowance to your employees for business journeys made in either their own vehicle or a company car, you can reclaim the VAT on the fuel element of those mileage payments.
How it works: Private vehicles
The mileage allowance for private cars is 40p per mile for the first 10,000 miles and 25p per mile for additional business miles driven in the same tax year. These rates have remained unchanged for more than six years and they are deemed to include an element of reimbursement for the vehicle’s other running costs.
To calculate the fuel only element you should refer to the HMRC advisory fuel only rates, published on their website at: www.hmrc.gov.uk/cars/advisory_fuel_current.htm. These rates are re-issued at least every six months and the latest rates apply from 1 January 2009.
In order to reclaim the VAT component of the fuel element, firms should retain VAT receipts to cover the amount of fuel that is deemed to be used in the business journey. When an employee submits an expense claim for business mileage he or she must state the engine size of their car, or the band it falls into, and provide VAT receipts for the fuel purchased. It does not matter that the employee initially purchased the fuel rather than the business.
Fred drives 1,000 business miles in his own car, which has a 1500cc diesel engine. The value of the fuel used according to the fuel advisory rates is 11p per mile: £110. The VAT element is 3/23 x £110 = £14.35. Fred must supply his employer with fuel receipts totalling at least £110 to allow the business to reclaim the VAT shown on those receipts.
How it works: Company cars
Some companies may pay for the entire quantity of fuel consumed in a company car, which will inevitably include fuel used in private journeys. This takes the business into the realm of the VAT fuel scale charges, and brings the increased risk of incorrectly recording the figures on the VAT return as exemplified below. A new table of scale rates is published in the Budget each year to take effect from VAT periods beginning on and after 1 May.
Albert drives a company car with CO2 emissions of 180g/km. His employer pays £500 in a quarter for fuel that is used for both business and private journeys. The business can then recover input VAT on the fuel using the following calculation: 3/23 x £500 = £65.22. However, as some of this fuel was used for non-business purposes the VAT scale charge will need to be applied. This is effectively an output VAT charge on the fuel supplied to Albert that he uses privately, but the scale does not vary with the miles driven per quarter or year, only with the CO2 emissions of the vehicle. The quarterly VAT scale charge in this case is £43.17.
Advice for employers: How to recover VAT
In your quarterly VAT return you need to include £43.17 in box 1, and reclaim £65.22 in box 4. The VAT exclusive value of the scale charge (£287.83) is included in box 6 of the VAT return, which is the outputs box.
It is possible that the output VAT in box 1 will exceed the VAT reclaimed in box 4. In this case your business will lose out by operating the VAT scale rates. The only way to avoid this is not to reclaim VAT on any fuel purchased for company vehicles, but you must tell HMRC when you change your practice in this area. Alternatively, you can ask your company car drivers to pay for their own fuel and then pay mileage allowances for business journeys only.
We can help you calculate and reclaim VAT on car fuel – contact us for further advice and information.