VAT on mileage : all you need to know
As you probably know, when a driver uses their personal vehicle (a car, van, motorbike or bicycle) for business purposes, it may be possible for them or their employer to make a claim for the mileage covered and the fuel they use. Depending on whether fuel is included in their mileage allowances, employers and employees can claim tax relief using the approved mileage allowance payment rates published by the HMRC. The current HMRC-approved mileage rates for cars and vans are 45 pence for the first 10,000 business miles, which goes down to 25 pence per mile after that. Lower rates apply to motorcycles and bicycles.
Approved mileage allowance payments
Applying the approved mileage allowance payments can sometimes be cheaper for the employer than leasing a car for employees to use. Self-employed workers are covered by a different scheme, known as the HMRC Simplified Expenses scheme, but are eligible for similar tax relief on their business mileage.
Different schemes and tax incentives are in place for employees and self-employed workers using their own bicycles as a means of transport.
What is less well known is that, under certain circumstances, drivers or their employers can also claim back the VAT on the cost of the fuel they use during their business trips.
Let’s look into VAT and mileage payments in a bit more detail.
The approved mileage allowance payments published by HMRC are designed to cover the costs of wear and tear on the vehicle, as well as insurance, tax and any fuel costs incurred by the driver in the course of their business activities.
The only part of the mileage allowance upon which VAT can be reclaimed is the part relating to fuel costs.
The best way to calculate the amount of fuel used during business trips is to refer to the Advisory Fuel Rates (AFRs). These rates are published quarterly by the HMRC.
Advisory fuel rates
The AFRs depend on the type of fuel used and fuel prices, both of which are notoriously unstable. This is why the rates are updated on 1 March, 1 June, 1 September and 1 December each year. The rates are “advisory” only but ensure that employees are fairly compensated for the cost of running company vehicles as part of their job. These rates are designed only to cover the cost of fuel. They are not applicable to other on-road costs such as insurance, maintenance and wear and tear.
There are different advisory fuel rates for vehicles powered by petrol, diesel, liquefied petroleum gas (LPG) and fully-electric vehicles.
The current advisory fuel rates for a petrol car range from 14 pence to 25 pence per mile, depending on the size of the engine. For diesel cars, the advisory fuel rates range from 13 pence to 19 pence per mile. For liquefied petroleum gas cars, the rates range from 9 pence to 16 pence. The advisory fuel rate for fully-electric vehicles is 5 pence per mile.
What journeys are covered?
The journeys that are covered by the mileage allowance payments for employers and employees and the Simplified Expenses scheme for self-employed workers must be undertaken “wholly and exclusively” for company business. That means that you cannot pick up supplies on the way back from a school run or extend a business trip to do some sightseeing.
What journeys are not covered?
Commuting from home to the usual place of work is not defined as “business travel” and therefore does not fall within the mileage allowance payment scheme. Drivers cannot, therefore, claim back VAT on this journey. Travel to a temporary workplace, such as a building site, is included.
A “temporary” place of work is defined by HMRC as a workplace that the worker attends for less than 40% of their working time, is for a limited duration (such as a meeting) or is for less than 24 months.
For international journeys, only the VAT on the price of fuel purchased within the UK can be reclaimed.
Employers should also bear in mind that the person driving the vehicle must be an employee of the company, not sub-contractors or freelance workers who are effectively employed elsewhere (either by another company or by themselves).
How to calculate VAT
In order to make a VAT claim, the business (or the business owner in the case of a self-employed worker) must be VAT-registered. It cannot fall under the flat-rate scheme.
In order to calculate the VAT that can be claimed back on the fuel part of a mileage allowance payment, you need to bear in mind that the advisory fuel rates already include VAT at a rate of 20%. In other words, a gross mileage allowance payment of £120 includes a £100 payment + £20 VAT. The formula for working out how much VAT can be claimed back is as follows:
VAT = advisory fuel rate x mileage travelled / 6 (because 120/20 = 6)
Elements to include in a VAT claim
Employers can claim back VAT on their employees’ fuel expenses if they pay them a mileage allowance payment for using their own vehicle for business purposes and that mileage allowance payment includes fuel. Remember, only the fuel part of the payment is relevant for VAT.
Meticulous records need to be maintained and produced in the event of an HMRC inspection. These records must include the following elements:
- The date and time of the journey
- The start and end points of the journey
- The type of vehicle used (including engine capacity)
- The type of fuel used
- The purpose of the trip
- The actual mileage driven
- Receipts for fuel, including the amount of VAT
These records must be complete and any claims which cannot be backed up by documentation will be refused by HMRC (with few exceptions). Filing incomplete claims may also give rise to penalties, so it is strongly advised to keep detailed, accurate records of mileage, fuel and VAT.
Are you looking for an easier way to record and track business travel costs? Do you want to make it easier for you and your staff to calculate fuel costs and reclaim VAT? Do you want to get rid of the need to collect paper receipts and invoices? Mooncard Mobility may be just the solution you are looking for. Get in touch for a no-strings-attached demo of its uses and a tailor-made quote corresponding to your business needs.