As readers may remember, in March last year the ECJ ruled against the UK over the validity of UK legislation which allows a business to reclaim VAT on road fuel, either where the employee purchases the fuel and is directly reimbursed for the purchase or where the employee purchases the fuel and is reimbursed for the business element by an allowance calculated by reference to the business miles travelled and the engine size of the vehicle.
Following this decision, HMRC was going to have to change the law to comply with the ECJ, and it was feared that this would cause problems to businesses. In fairness to HMRC they did want the change and fought hard to prevent it. They has now passed new legislation and issued guidance on what is now required.
As we reported in issue …… our source inside HMRC’s policy unit told us “If formal approval is granted the new legislation ensures that UK business can continue in the same way to recover input tax on employees’ fuel expenses. The only anticipated change is that employers will have to retain the simplified invoice as evidence of purchase.”
HMRC initially published the changes in the Business Brief 22/05, however, as most things published by HMRC to clarify the situation, it caused confusion and uncertainty. HMRC addressed these matters in a VAT Information Sheet 08/2005.
As we predicted, the changes are not going have much impact on the recovery of VAT on road fuel. The only practical change to the current system is that an invoice must be retained in support of a claim for VAT recovery - in the vast majority of cases, this will be a less detailed tax invoice.
The change comes in from 1 January 2006 regardless of the VAT return period end date. From that date, employers should retain VAT invoices, including less detailed VAT invoices, that their employees obtain from the fuel supplier as proof of purchase.
However, HMRC acknowledges that businesses will need a little time to make the necessary changes to their arrangements in order to hold VAT invoices in support of their claims. Therefore, he has said that he will be administering the change with a light touch until such time as businesses have had a reasonable period to adjust to the new requirement.
As with the existing system, input tax may only be claimed on the cost of fuel for business use. As such, invoices only need to cover this amount.
HMRC accept that the amount of the invoice in many cases will not match the input tax claim in respect of business fuel in any one claim period and invoices may cover more than one period, particularly where fuel is purchased towards the end of a period. Clearly, a claim cannot be supported by a VAT invoice which is dated after the dates covered by the claim. This means, in practice, that it may be advisable for employers to arrange for their employees who use, or may use, their cars for business purposes to retain all fuel invoices. This will ensure that, at the end of the claim period, the value of business fuel is covered by an invoice.
This will mean that employers will have to “remind” staff to retain their petrol invoices.