Demystifying VAT on Mileage Expenses

By EmmaJanuary 27, 2017

-This article was last updated on 23 September 2021-

If thinking about VAT and HMRC mileage allowances gives you a sore head then you’re in the right place. Claiming VAT on the 45p mileage allowance is appealing if you’re an employer, but not the most straightforward of tasks. In this article we will break it down step by step to shed some light on the issue.

Two small red and blue toy cars next to a white calculator

Employees using their own vehicle for business purposes can claim 45p per mile for the first 10,000 miles and 25p per mile after that. If the employer pays less then the employee can get mileage relief from HMRC, if they pay more then the additional amount is taxed as income. This rate is to cover fuel as well as the other costs associated with running a car. If the employee is using a company car then only fuel costs can be claimed for. This can be calculated using the HMRC advisory fuel rates. Easy enough so far.

Now comes the tricky bit. As we mentioned before, fuel costs are included in the 45p rate for employees using their own cars. Employers can claim VAT back on fuel, meaning that there is some VAT to be claimed in the 45p rate. To work this out we need to know how much of the 45p rate is fuel costs. You can find this in the HMRC advisory fuel costs. So if the employee drives a 1600cc petrol car then the fuel rate is 13p per mile. Now we need to work out how much VAT there is in that 13p. As VAT is 20% we will divide the 13p by 120 and multiply this by 20, giving us about 2.2p in VAT.

Lets show this with a real example:

John drives 1,000 business miles in his own 1600cc petrol car. At 45p per mile John can claim back £450. John’s employer can claim some VAT back on this. For John’s car the fuel rate is 13p per mile, totaling £130 for his 1,000 miles. Lets work out the VAT.

(130/120)*20 = £21.67.

And there we have it! John’s employer can claim back £21.67 in VAT.

The only stipulation is that to claim back this VAT you must have fuel VAT receipts showing that at least £21.67 has been paid in VAT.

This is a nice little way to claim back some more VAT on mileage expenses but quite fiddly and can become fairly time consuming, especially if you have a few employees.

At ExpenseIn we calculate this all for you! All you need to do is enter the mileage and car type and we’ll worry about the maths. Why does VAT on mileage expenses need to be vexing?