The Basic Systems
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 petrol receipts; or
• don’t claim back the VAT on road fuel.
So let’s have a look at how the different methods work...
VAT Scale Charge
If you reclaim any VAT on road fuel for private motoring HMRC will insist that you pay 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 Notice 700/64.
The scale charge must be added to the output tax (box 1), on the VAT return. If the business has a second or more cars and private fuel is provided, even with low mileage, there is a second or subsequent, scale charge. The only way around this is to have no fuel provided for private motoring for the second car.
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 will be due on the payments received.
On the plus side, the VAT on all road fuel, both business and private, can be reclaimed and the system is simple to use. On the down side, you have to have quite high mileages for it to be financially worthwhile
If you do not want to use the Motoring Scale Charge because the Scale Charge is more than the VAT on the road fuel, you can record all of your mileage in a mileage log showing the business mileage and the total mileage. So if you have done 5,000 miles in the quarter and 1,000 are business miles then you can recover 20% of the VAT. The system is accurate but complicated.
If you do not want to pay the Scale Charge and the mileage log is too much of an administrative burden, then you 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. You then apply the VAT fraction to that figure and claim it back as input tax. You do need to have expenses forms to back up the claims and you will need to obtain petrol receipts to support the claim. Any purchases of less than £250 including VAT only require a less detailed tax invoice. Where possible this is the method I would recommend.
The only other alternative is not to claim back the VAT on any road fuel at all.