Demystifying VAT on Mileage Expenses
-This article was last updated on 19 April 2023-
VAT on mileage expenses is an often-overlooked area. However, if you are not considering it as an employer, you could be leaving money on the table. Nobody wants to be paying more tax than they should, so making sure you know how to calculate VAT on mileage is a great way to ensure you are claiming back what you are entitled to from HMRC.
In this article, we are going to run through everything you need to know to make sure you are able to properly calculate and claim back VAT on mileage expenses.
Table of Contents
- What is VAT on Mileage?
- Calculating VAT on Mileage
- Evidencing a VAT on Mileage Claim
- VAT on Mileage Software
- VAT for Employers Covering Fuel Costs
- What About Electric Cars?
What is VAT on Mileage?
In short, VAT on mileage refers to the application of VAT on expenses related to business travel or the use of vehicles for business reasons. If you pay your employees for business journeys in their personal vehicles, you likely pay the HMRC Mileage Allowance Payments rates. For cars and vans, this is currently 45p per mile for the first 10,000 miles a year and 25p for any additional miles.
VAT on Mileage Payments
These payments are made up of two parts. One part is meant to cover the wear and tear associated with the extra use of the employee’s vehicle. The other, and the part that we are interested in here, is to cover the fuel cost. As VAT is charged on fuel, you can claim back the VAT suffered on this fuel cost.
Mileage Allowance Rates
Now that we know one element of the Mileage Allowance Payment is made up of a fuel cost, we need to know how much that element is. HMRC publishes these quarterly as Advisory Fuel Rates. The rates are split by engine size and are divided up as following:
Petrol and LPG engine sizes:
1400cc or less
1401cc to 2000cc
Diesel engine sizes:
1600cc or less
1601cc to 2000cc
Calculating VAT on Mileage
Calculating the VAT element of a mileage expense is as simple as working out the VAT element of the fuel rate and multiplying it by the number of miles claimed. You can work out the VAT suffered on an amount by multiplying it by the VAT fraction, which currently for standard-rated goods is 1/6.
VAT on Mileage - a Worked Example
Let's say that Jane has put in her first mileage claim of the year, she has worked out that she has driven 155 miles for business trips this month in her personal car. She drives a petrol car with a 1000cc engine. We’ll work through this example step by step:
Jane will get paid the 45p per mile rate for this claim, meaning her claim amounts to 155 multiplied by 45p, totalling £69.75.
We need to find out what fuel rate applies to Jane’s car. HMRC’s advisory fuel rates show us that her 1000cc petrol car has a rate per mile of 13p.
Next, we calculate the total fuel cost of the claim. We do this by multiplying the mileage of 155 by the fuel rate of 13p, giving us a cost of £20.15.
Now we follow the formula we covered earlier to work out how much of the fuel cost is VAT. Multiplying the VAT fraction of 1/6 by the fuel cost of £20.15 gives us a VAT amount of £3.36.
Jane’s employer can now claim back that £3.36 as input VAT.
Evidencing a VAT on Mileage Claim
HMRC stipulates that a business must keep adequate records to support any claims. For fuel purchased by employees, this could take the form of a fuel receipt that shows the VAT breakdown. It is likely that the VAT shown on the receipt won’t match the VAT of the claim, however, you must ensure that the receipt shows sufficient VAT was paid to cover the VAT in the claim. In addition, the date of the fuel receipt must be before the date of the claim.
When it comes to keeping receipts for your records, HMRC accepts digital copies of receipts. In fact, digital copies are often favourable; paper receipts have a habit of getting lost and can even fade over time so a digital record can prove far more useful.
VAT on Mileage Software
We now know how to calculate the VAT on mileage expenses and what records are needed to support the claims. For a single claim, this doesn't seem too bad. However, with multiple claims a year for multiple employees, the admin burden can soon add up.
This is where expense software designed to handle VAT on mileage claims can be of help. Expense software can help calculate and track mileage for employees, store digital receipts and automatically calculate the VAT on mileage for any claims. In fact, the additional benefit of claiming VAT on mileage can offset some or all the costs of using these systems.
VAT for Employers Covering Fuel Costs
There are four scenarios for the VAT treatment of road fuel expenses when incurred by the business:
The business pays for all the fuel for a car, such as a pool car. All the VAT suffered on fuel can be reclaimed.
For company cars where there is private mileage, you can claim back the VAT suffered on fuel and either apply the road fuel scale charges or account for the amount charged to employees in your output tax.
If a business does not want to use the scale charges, they can keep detailed records of private against business mileage and apportion the VAT appropriately.
By concession, a company can choose not to apply the scale rates so long as they do not claim input tax. This is aimed at small businesses with low mileage.
What About Electric Cars?
Electric cars have become far more prevalent in recent years and are here to stay. The tax system can take a while to catch up to new trends and unfortunately VAT on mileage is no exception. HMRC publishes advisory fuel rates for electric vehicles and as of 1st March 2023, this is 9p per mile.
So where does that leave us for reclaiming VAT on mileage? Petrol and diesel are standard rated so working out if enough VAT has been suffered to cover the cost of the claim is fairly straightforward.
There is VAT chargeable on electricity too, so on the face of it, there shouldn’t be an issue with reclaiming that VAT. However, where the car was charged can have an impact on what VAT is suffered.
Paying to use a commercial electric charging point will have you paying the standard rate of VAT, but domestic electricity attracts the reduced rate of 5%. If an employee charges their car at the office then that VAT is likely already being reclaimed by the employer.
All this means that we cannot just apply the fuel rules for petrol and diesel as they are for electric cars. HMRC is yet to publish any guidance to clarify this so for now this remains very much a grey area.
To sum it up, claiming back VAT on mileage expenses is an area that all businesses should be considering to ensure they are not overpaying on tax. Although there is some administrative burden when calculating the amounts to claim, the right expense management software can remedy this.