The recovery of VAT on motoring expenses continues to cause confusion to businesses and advisers alike, so here is a quick look at the different methods of recovering VAT and the advantages of each.
The basic systems for recovering VAT on motoring expenses are:
- Claim all the VAT back on road fuel and pay the motoring scale charge.
- Keep a detailed mileage record and calculate the proportion of VAT relating to business mileage.
- Pay a mileage allowance and keep the fuel receipts.
- Do not claim back the VAT on road fuel.
There are advantages to the different methods, which are examined below.
VAT Scale Charge
If a business reclaims VAT on road fuel for private motoring, HMRC will insist that it pays the motoring scale charge. This charge is based on the CO2 emissions of the car and not the actual amount of private usage. The mileage rates can be found in Notice 700/64. As the scale charge is based on CO2 emissions, businesses will pay a lower rate on hybrid cars and a nil rate on pure electric cars, although HMRC states that the business should only recover VAT on business use. The scale charge must be added to the output tax (box 1) on the VAT return.
If a company car driver repays the business in full for the fuel that they use for private motoring, then no scale charges are due, but VAT will be due on the payments received.
On the plus side, the VAT on all road fuel (both business and private use) can be reclaimed, and the system is simple to use. On the downside, a business has to have quite high mileages for it to be financially worthwhile.
Mileage Records
If a business does not want to use the motoring scale charge because the scale charge is more than the VAT on the road fuel, it can record all its mileage in a mileage log showing the business mileage and the total mileage.
So, if the business has done 5,000 miles in the quarter and 1,000 are business miles, it can recover 20% of the VAT. The system is accurate but complicated.
Pay a Mileage Allowance
If a business does not want to pay the scale charge and the mileage log is too much of an administrative burden, it can pay a mileage allowance and claim back the VAT on the element relating to road fuel.
The AA and RAC publish mileage rates that give the fuel costs per mile for the different engine sizes; these can also be obtained from the HMRC website. It normally works out at between 10 to 15 pence per mile, depending on the engine size. The business then applies the VAT fraction to that figure and claims it back as input tax. The business does need to have expense forms to back up the claims, and it will need to obtain fuel receipts to support the claim.
The only other alternative is not to claim back the VAT on any road fuel at all.
Electric Cars
VAT incurred by businesses when charging electric vehicles can be recovered on the business use of those vehicles. This applies where the vehicles are charged either:
- atwork; or
- at a public charging premises.
A business can also recover the VAT for charging an electric vehicle for business purposes at home, if they are:
- a sole proprietor; or
- a partner in a partnership business.
They should work out how much of the cost of charging the electric vehicle is for business and private use by keeping mileage records.
Maintenance
Provided the business pays the maintenance costs of the vehicle, it can reclaim the VAT in full and does not need to make an allowance for private use.
Practical Tip
The most efficient method is probably to pay a mileage allowance.