For many business owners, motoring costs represent a significant proportion of their firm’s expenditure. As fuel prices have recently climbed 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 VAT on the fuel element of those mileage payments.
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. These rates are re–issued at least every six months and the latest rates apply from 1st July 2008, though by concession they can be used from 1st June 2008.
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 13p per mile: £130. The VAT element is 7/47 x £130 = £19.36. Fred must supply his employer with fuel receipts totalling at least £130 to allow the business to reclaim VAT shown on those receipts.
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 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 1st May.
Albert drives a company car with CO2 emissions of 180g/km. His employer pays £500 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: 7/47 x £500 = £74.47. 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 VAT scale charge in this case is £49.30.
In your VAT return you need to include £49.30 in box 1, and reclaim £74.47 in box 4. The VAT exclusive value of the scale charge (£281.70) 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 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.
The rates are reviewed four times a year with any changes taking effect at the beginning of each calendar quarter - on 1 March, 1 June, 1 September and 1 December. Employers should check the HM Revenue & Customs (HMRC) website (Advisory Fuel Archive) regularly to make themselves aware of any changes