Civil Litigation Solicitors

Car Fuel and VAT – Your Options



With car fuel becoming more expensive by the week, the amount of VAT which can be recovered on fuel used for business purposes is also rising.



There are three ways in which car fuel can be dealt with for VAT purposes:



1. The Scale Charge

If fuel is provided for motoring which includes private motoring, a ‘fuel scale charge’ is paid to HM Revenue and Customs (HMRC) as additional output VAT when the VAT return is submitted. This system favours businesses with employees who do quite a lot of private mileage.



2. The Strict Method

In this system, a detailed mileage log is kept and VAT on private mileage is not claimed. The total VAT on fuel is worked out and only the business proportion is claimed. This system necessitates keeping detailed and accurate records, which can be onerous, but is normally the best method to use.



3. Do Not Claim VAT

A scale charge is not applied where there is no claim of input VAT on fuel. This system may suit businesses with very low business mileage.



However, an alternative method is applicable which can be efficient for many businesses. In this case, the employee pays the cost of fuel and provides a record of business mileage done. The employee must provide the VAT receipts for their fuel purchases. Using this method allows the employer to reimburse business mileage at the rates below and to claim the VAT element (7/47 of the payment made) as input tax.



The rates currently applicable are



Engine Size
Petrol
Diesel
LPG

1400cc or less
11p
11p
7p

1401cc – 2000cc
13p
11p
8p

Over 2000cc
19p
14p
11p




The payment made to the employee is effectively tax-free in his hands. If a dispensation is obtained from HMRC, no return of expenses paid to employees needs to be made.





Partner Note

For more information on Motoring Expenses, see http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&propertyType=document&id=HMCE_CL_000090.