This is a common question I am asked by my clients. Therefore, I thought it was time I clarified whether you can indeed claim VAT back on mileage payments to you and your employees?
The short answer is yes. However, how this is achieved is slightly more complicated.
Just to clarify, HMRC allows employees and business owners to claim mileage for every business journey they make. You are probably already familiar with these rates, but just in case, they are:
Up to 10,000 miles
Over 10,000 miles thereafter
Cars and Vans
Just as a side note, if you or your employees get paid more than the above rates then you will be taxed on the difference. Likewise, if you or your employees get paid less than the rates stated above, you are both eligible to claim tax relief.
Now, back to VAT…
To understand the proportion of VAT you can claim, it is important you are aware that mileage expenses not only cover petrol, but also wear and tear and other running costs. This is why the rates decrease over 10,000 miles, as HMRC believe that by this point you have already been compensated for your running costs.
Consequently, claiming VAT back can be done, but only on the fuel element of the expense. For this to be achieved, you need to work out how much of the 45p/25p is for petrol/diesel costs. And the way to do this is through using the advisory rates published by HMRC, which you can find below.
Petrol – amount per mile
LPG – amount per mile
1400cc or less
1401cc to 2000cc
Diesel – amount per mile
1600cc or less
1601cc to 2000cc
To work out how much VAT you can claim you then have to do the following calculation. I have demonstrated this here with an 1800cc, petrol car.
Step 1: You and your employees are entitled to claim 12p per mile of the 45p as fuel (This 12p includes VAT).
Step 2: 12p represents 120% (100% plus 20% VAT). To work out the VAT element you simply need to do the following sum: 12 divided by 1/6 = 2p. Therefore, for every business mile you or your employees make you can reclaim 2p in VAT.
This means that for every 1,000 miles you claim in an 1800cc, petrol car you can claim £20.00 in petrol.
The only thing you need to be aware of is that you need to have enough VAT petrol receipts to cover the amount of the claim, so in the above scenario your fuel receipts would need to total £120.
For this to work, you need to get your employees into the habit of keeping hold of their fuel receipts. There are some great pieces of software that can help with this, such as Xero, which requires you simply to take a picture of the receipt. The information is then stored in the system; never will you have to worry about losing a receipt again.
I hope the above sheds some light on this slightly complicated process. If you have any questions or would like to discuss your personal circumstances in more detail, please contact me at Stephen@kppca.co.uk