VAT on Fuel
Are you recovering the VAT?
For many business owners motoring costs represent a significant proportion of the company's expenditure. Reclaiming the VAT on car fuel is an ideal way to recover some of these costs.
A key VAT rule is that input tax can only be reclaimed on expenses that relate to 'taxable supplies made by a business', but not on expenses for private or non-business purposes.
You must make sure that this process is carried out correctly; this is an area that a VAT inspector will scrutinise closely when accounting records are reviewed.
An employee can use his or her own car for business purposes and is able to claim mileage at an agreed amount (currently 45 per mile for the first 10,000 miles and 25p per mile thereafter). If an employer pays more than this, then the additional amount will be taxed as income. If an employer less than this you get mileage relief from HMRC.
The rates includes an element of reimbursement for the vehicle's other running costs. To calculate the fuel element only you should refer to the HMRC Fuel Advisory rates. Since March 2011 the rates are reviewed four times a year. Any changes take effect at the beginning of each calendar quarter - on 1st March, 1st June, 1st September and 1st December and are published on the HMRC website shortly before the date of change.
So if you have an employee who has a car with a 1400cc petrol engine, and the fuel portion of the 45/25 mileage rate was 14 pence per mile:
14 pence per mile represents 120% (100% plus 20% VAT)
Therefore 20/120 multiplied by the 14p is 2.3 pence per mile. So for each mile that you pay that employee, you can claim back 2.3p in VAT
In order to reclaim the VAT of the fuel element, you should retain VAT receipts to cover the amount of fuel that is deemed to be used in the business journey. When the employee submits an expense claim for business mileage they 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 if the employee purchased the fuel rather than the business.
If private mileage is very low the business can account for VAT based on exact mileage. Alternatively , a business need not reclaim VAT at all.
If the business chooses to reclaim the VAT on fuel provided for private use, an adjustment to reflect that private use is needed, this is commonly adjusted through the use of the VAT Fuel Scale Charge to add back a fixed sum on account of private consumption of fuel. The scale charges are added to Output VAT, and add back a fixed charge for each period that the business is accounting for VAT.
Annual VAT Scale Charge Rates are available from the HMRC website - download Link (http://www.hmrc.gov.uk/vat/forms-rates/rates/rfsc-2014.pdf)
Flat Rate Scheme
If a business is using the VAT Flat Rate Scheme no VAT is claimed back on fuel as input VAT is automatically adjusted using the flat rate percentage.