Mileage claims are a popular way of businesses reimbursing Directors and Employees for using their own personal car. But did you know that you can also include VAT on mileage claims?
VAT can only be reclaimed on the fuel element so read on to see how you can reduce your VAT liability by calculating VAT on mileage claims.
What is a mileage claim?
An Employee or Director who uses their own car for business purposes will incur fuel costs which are then typically reclaimed from the business. The amount claimed is based on business mileage and not the fuel receipts.
The first 10,000 miles are claimed at 45 pence per mile. Anything over 10,000 miles is claimed at 25 pence per mile. These amounts are annual figures and are the HMRC approved mileage rates.
If a business pays in excess of these mileage rates the additional amount is treated as taxable income.
If a business pays less you can reclaim some tax relief from HMRC.
HMRC fuel advisory rates
The mileage claim is intended to cover all of the car costs and not just the fuel. Therefore it includes insurance, road tax, as well as wear & tear.
As mentioned in the introduction you can only claim back the VAT on mileage claims which relate to the fuel amount.
So, how much of the 45 pence or 25 pence relates to fuel?
Fortunately HMRC publish fuel advisory rates which can be used to calculate the fuel portion on the mileage claim.
For example using the HMRC link the fuel amount is 14 pence per mile for a 1600cc petrol car (September 2019).
How to calculate VAT on mileage claims?
At this point we know what the mileage claim is and we know how to obtain the fuel advisory rate. So, how do we go about calculating the VAT on mileage claims?
Step 1: Take the fuel advisory rate and multiply by the number of business miles claimed. This gives us the total fuel amount.
Step 2: Take the total fuel amount and multiply by the VAT fraction. The VAT rate is currently 20% so the VAT fraction is currently 20/120 which can by reduced down to 1/6th.
n.b Anybody who deals with VAT regularly will know that step 2 is basically calculating the VAT on a Gross amount.
The above 2 steps can be written as the following formula:
VAT = (Fuel Advisory Rate x Business Miles) / 6
VAT on mileage claims – Example
A petrol car with a 2.5 litre engine does business miles totalling 18,000 over the course of the year.
The VAT which can be reclaimed on the mileage claims over the year totals £630.
It is calculated as follows:
Step 1: The fuel amount is calculated as 21 pence per mile x 18,000 miles which equals £3,780.
n.b 21 pence per mile is the fuel advisory rate in September 2019 for a petrol car with an engine over 2000cc. For illustration purposes we assume that this rate stays the same for the whole year. Typically HMRC change the rates every quarter.
Step 2: Take the fuel amount and multiply be the VAT fraction of 1/6th gives VAT of £630.
What would the monthly mileage claim look like?
Most businesses account for mileage claims on a monthly basis. If we take the above example and let’s say that in September 2019 the business miles were 1,500. We will also assume that the annual mileage claimed to date is well under 10,000 miles.
The total mileage claim:
As it is under 10,000 miles the approved mileage rate is 45 pence per mile. Multiplied by 1,500 miles gives a mileage claim of £675.
VAT on mileage claim:
As mentioned previously the fuel advisory rate is 21 pence per mile (September 2019 – petrol car with over 2000cc). Multiplied by 1,500 gives a fuel amount of £315.
The VAT on the fuel amount is £52.50.
|Total Mileage Claim||£622.50||£52.50||£675.00|
N.B The amounts in bold are shown in the previous calculations. The amounts not in bold such as the Non-Fuel amounts are just the differences to make the figures balance.
VAT on mileage claims with over 10,000 miles
The mileage claim reduces to 25 pence per mile if the business miles claimed exceeds 10,000 in any year. However this does not change the VAT calculation as it based on the fuel advisory rate.
If we take the above example the total mileage claim becomes £375. (1,500 miles multiplied by 25 pence a mile).
NOTE: The 1,500 miles is the monthly amount only. The year to date total exceeds 10,000 miles in this example.
The summary table would look as follows:
|Total Mileage Claim||£322.50||£52.50||£375.00|
Fuel receipts to support VAT on mileage claims
In order to claim the VAT on mileage claims a fuel receipt(s) covering the claim must be kept.
This can be confusing as you don’t claim the VAT back on the fuel purchased, so the receipt seems pointless. However those are the HMRC rules, so yes you and your employees must provide fuel receipts if you wish to include VAT on mileage claims.
The fuel receipts must cover the VAT. So to reclaim VAT of £52.50 there must also be fuel receipts totalling £315.00.
The fuel receipts can be dated throughout the month or period claimed. However they must be dated before the last date on the period claimed. i.e don’t include fuel receipts dated October 2019 to cover a mileage claim for September 2019.
Flat rate VAT scheme
Businesses which calculate VAT using the flat rate scheme can’t include VAT on mileage claims.
n.b The flat rate scheme is a method of calculating your VAT liability just as a percentage on your sales total. You don’t reclaim any VAT on day to day purchases or expenses. Therefore businesses operating the flat rate VAT scheme can’t include VAT on mileage claims as this is just another day to day cost.
The amount of VAT reclaimed can seem quite small. However if you have numerous employees who all complete mileage claims, over the course of a few months and years the VAT reclaim will add up.
Also, the effort of actually keeping mileage records can be quite time consuming. So, if you and your employees go to all this effort in keeping business mileage logs it doesn’t take much more effort to put a quick formula at the bottom of the calculation.
As Chartered Accountants we understand how important it is to save tax whenever possible. So a simple opportunity to save VAT legally should not be dismissed. If you would like any further information please do not hesitate to contact us.
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