If your business pays for road fuel, it can recover the VAT element relating to business use. There are different methods for working out the amount reclaimable. Which is the best for your business? Our VAT expert John Craig outlines some options in this article.
VAT incurred on the cost of road fuel used by your workers (employees and contractors) can be reclaimed so far as it relates to business mileage. It’s often said that there are three different ways to calculate the VAT reclaimable but two of these more or less come down to the same thing. The methods are:
1.Where you only pay for road fuel that’s used for business mileage, you can reclaim all the VAT
2. Where you pay for fuel used for private and business mileage, you can reclaim all the VAT but account to HMRC for that relating to private journeys; or
3. Reclaim VAT on all fuel costs and account for VAT using HMRC’s flat rate charge, also known as the scale charge.
You can choose which method you want to use for whatever reason, e.g. for convenience, maximum VAT recovery. What’s more, you can use different methods for different workers in the same VAT return period and change methods from one VAT return period to the next. That way you can maximise your VAT claim for each return.
Choosing the right option
In practice, the first way can only be used where the worker uses a vehicle exclusively for business travel or you pay a mileage allowance for business journeys. In any circumstance where you pay for or reimburse a worker the cost of filling their vehicle, the fuel will almost inevitably be used for a mixture of private and business mileage and so either the second and third methods must be used to calculate the VAT reclaimable.
When to use mileage records
Unless you are certain that the fuel you pay for (or reimburse) is only used for business journeys, your worker must keep a record of business and total mileage driven in each VAT return period and provide this information to you so that you can calculate the VAT you can reclaim.
Hamish frequently travels on business for his employer Top Scot Ltd in his company van. He always pays for fuel using his company fuel card. The van is available to Hamish for business and private journeys. At the end of each VAT return period Top Scot’s bookkeeper asks Hamish for details of his business mileage and the total mileage. In the quarter ending 30 April 2023, Hamish’s fuel costs were £990. His business mileage was 6,200 out of 7,200 total. Top Scot Ltd reclaims 86.1% of the VAT paid on the £990, i.e. £142.08 (990 x 20/120 x 6,200/7,200). Although for a few reasons this won’t be exactly correct, it’s acceptable to HMRC because it produces a fair and reasonable result.
The circumstances are the same as Example 1 except Top Scot Ltd doesn’t bother with workers’ mileage logs and so uses HMRC’s scale charge instead. It reclaims VAT of £165 (£990 x 20/120) and accounts for VAT of £72.83 on the scale charge of £437 (the charge varies according to the vehicles CO2 emissions). Top Scot’s net VAT recovery is therefore £92.17. A less generous result than using the business mileage but a little less fiddly. Depending on the business mileage covered the scale charge might also result in a greater recovery of VAT.
There are three methods for calculating the amount of VAT reclaimable on road fuel. Two of these require the driver to keep mileage logs of business journeys, the other produces a less accurate result based on HMRC flat rate scale charges but is less fiddly to use. You can switch methods each VAT return period and use that which produces the best result.
If you would like further VAT advice do get in touch with JRW to fully discuss the implications.