Fuel costs represent a significant outlay for your business. But as there are many different ways of dealing with the VAT on motoring expenses, how can you be sure to get the most back with the least amount of admin?
Different methods
The basic options for recovering VAT on motoring expenses are:
l claim all the VAT back on road fuel and pay the motoring scale charge
l keep a detailed mileage record and calculate the proportion of VAT relating to business mileage.
l pay a mileage allowance and keep the petrol receipts, or
l don’t claim back the VAT on road fuel.
So how do the different methods work?
l VAT scale charge: If you reclaim VAT on road fuel for private motoring, the VAT man will insist that you pay the motoring scale charge. The only way around this is to have no fuel provided for private motoring for a second car. 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 the payment they make automatically includes VAT, which you will have to add to Box 1 on your return.
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 need quite high mileages for it to be financially viable.
l Mileage records: If you do not want to use the motoring scale charge because the charge you pay is more than the VAT on the road fuel that you can claim, you can record all of your mileage in a log, showing the business mileage and the total mileage. So if you have travelled 5,000 miles in the quarter and 1,000 are business miles, then you can recover 20% of the VAT.
l Pay a mileage allowance: If you don’t want to pay the scale charge and the mileage log is too much of an administration 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 VAT man’s website. It normally works out at 10-15p per mile, depending on the engine size. You then apply the VAT fraction to that figure and claim it back. You do need to have expenses forms and petrol receipts to back up the claims. This system is simple and gives good VAT recovery. Where possible this should be the recommended method.
The alternative is not to claim back the VAT on any road fuel at all but that seems pointless.
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