Business and fuel - the VAT alternatives

Judging by a recent spate of Ask An Expert questions on UKTECH, VAT on road fuel mileage rates is no doubt flavour of the month. Whether a business or an employee funds fuel for business use there can be pitfalls for the unwary. Barry Hincks, VAT expert with Qdos Consulting, has set out the option available to whoever purchases fuel.

Barry Hincks writes:

Barry HincksAlthough there are both advantages and disadvantages perhaps the most straightforward approach to buying fuel for business use is for the business to buy it and reclaim VAT using the VAT invoice received from the garage. This will be down to the policy of the business; does it fund road fuel for private use or not?

Nothing in life, and especially VAT, is ever quite that simple.

Business Funded Fuel

Where a business pays for road fuel and the fuel is used for business motoring only, then it can reclaim all of the VAT charged on its purchase. If the business pays for road fuel and it is used both for business and private motoring, the business has three options:

• It can claim all the VAT charged and declare a scale charge. (the payment of a scale charge allows a business to reclaim VAT on fuel used for private motoring in a particular car. The current rates are given in the table at the foot of this article).
  
• It can maintain detailed mileage records, separating business and private mileage.
  
• It can neither claim the VAT on any road fuel purchased nor declare a fuel scale charge.

First option

The first option is worth considering if VAT on the fuel used for private use exceeds the scale charge. It is also worth considering if VAT on fuel purchased for both business and private use exceeded the scale charge and the business did not wish to maintain detailed mileage records, or forgo any claim.

Second option

The second option should be considered where there is low private mileage and the business does not wish to pay a scale charge. The percentage business miles to total miles is then applied to the VAT on the fuel purchased and the resultant is the input tax reclaimed.

Third option

If fuel for private use is funded by the employer the third option should be considered when the VAT on all fuel purchased is below the scale charge or it was administratively inconvenient to maintain mileage records. It should be remembered that if this method is adopted HMRC should be notified in advance and this option applies to all fuel purchased by a business i.e. it cannot just be applied to one car used in a business; it must be applied to all including any commercial vehicles.

Where a business as in option two has funded private mileage the business should recharge the actual cost of the fuel used for private mileage and VAT declared on this. If no recharge is made or the recharge is below the actual cost of the fuel purchased the scale charge would apply.

Employee Funded Fuel

Road fuel bought by an employee is treated as having been supplied to a business for business purposes provided one of the following methods of reimbursement is adopted:

• The employee is reimbursed the actual cost of the business fuel used.
  
• The employee is paid a motor mileage allowance to cover the business mileage travelled and from 1st January 2006, the employee gives the employer the VAT invoice from the garage.

Both options allow a business to reclaim VAT only in respect of business mileage. If the cost of fuel for private mileage is reimbursed then a scale charge is payable. If a scale charge is paid then VAT on the private mileage can also be reclaimed.

In respect of payment of a mileage allowance of say 40p a mile, VAT can only be reclaimed on the fuel element of the allowance. If the HMRC's recommended amount is paid then the table below sets out the value of the fuel element of a mileage allowance that is acceptable to HMRC. The VAT that can be reclaimed by a business is 7/47 of the relevant amount.

Also if a business pays a motor mileage allowance it must maintain the following records:

• Mileage travelled
  
• Whether journeys are both business and private
  
• The cylinder capacity of the vehicle
  
• The rate of mileage allowance
  
• The amount of input tax reclaimed

From 1 July 2005, HMRC has published advisory fuel only mileage rates for company cars based on the engine capacity of the car and the type of fuel used as follows.

Engine Size

Petrol

Diesel

LPG

1400cc or less

10p

9p

7p

1401cc to 2000cc

12p

9p

8p

Over 2000cc

16p

13p

10p

Scale Charges

VAT periods beginning after 30.4.05

Annual

VAT returns

Quarterly

VAT returns

Monthly

VAT Returns

Cylinder capacity

«Scale charge»

VAT due per vehicle

«Scale charge»

VAT due per vehicle

«Scale charge»

VAT due per vehicle

£

£

£

£

£

£

Diesel engine

2,000 or less

945

140.74

236

35.15

78

11.62

More than 2,000

1,200

178.72

300

44.68

100

14.89

Other engines

1,400 or less

985

146.70

246

36.64

82

12.21

1,400 to 2,000

1,245

185.43

311

46.32

103

15.34

More than 2,000

1,830

272.55

457

68.06

152

22.64

Happy motoring!

Barry Hincks

Qdos Consulting