Sarah Bradford explains how VAT registered businesses can claim back VAT when they pay mileage payments to employees.
Employees often undertake business journeys, either in their own car or a company car. To keep things simple, many employers often opt to use mileage rates to compensate employees for the fuel costs and, where the vehicle is their own, the associated wear and tear.
HMRC publishes tax-free mileage rates that can be used to reimburse employees who use their own car for business journeys without triggering a tax liability.
In addition, HMRC publishes advisory fuel rates which are updated quarterly. These can be used as a basis for paying mileage payments to employees with a company car. Where payment is made at or below the advisory rate, no tax liability arises.
Employers who are registered for VAT can claim back input tax on the fuel element of any mileage payments they make for business mileage.
Calculating the input tax
The input tax on mileage payments made to employees is found by applying the fuel element of the mileage allowance by the VAT fraction.
At a VAT rate of 20%, the VAT fraction is 1/6.
The fuel element
There is more than one way to determine the fuel element of a mileage charge. However, the simplest way is to use the company car advisory rates which are published by HMRC, as these represent fuel-only mileage rates and HMRC accepts their use for the calculation of input tax on mileage allowances.
The advisory fuel rates applying from 1 March 2020 are shown in the table below.
|
Engine size |
Petrol – per mile |
LPG – per mile |
|
1400cc or less |
12 pence |
8 pence |
|
1401cc to 2000cc or less |
14 pence |
10 pence |
|
Over 2000cc |
20 pence |
14 pence |
|
Engine size |
Diesel - per mile |
|
1600cc or less |
9 pence |
|
1601cc to 2000cc |
11 pence |
|
Over 2000cc |
13 pence |
The advisory fuel rate for electric cars is 4 pence.
The rates are published on the Gov.uk website at www.gov.uk/government/publications/advisory-fuel-rates and previous rates can be found here. The rates are updated quarterly with new rates taking effect from 1 March, 1 June, 1 September and 1 December.
Although using the advisory fuel rates is an easy option as they are readily available on the Gov.uk website, this is not the only acceptable way to ascertain the fuel element where mileage rates are paid. The input VAT on the fuel element can also be calculated using fuel rates set by motoring organisations, such as the AA and the RAC.
Need to keep records
A claim is allowed so long as the mileage allowances that are paid to employees are based on the business mileage actually undertaken by the employee.
Consequently, HMRC requires that where VAT is reclaimed by reference to mileage rates, the employers keep records for each employee, which show:
- the mileage travelled;
- whether the journey is both business and private;
- the cylinder capacity of the vehicle;
- the rate of mileage allowance; and
- the amount of input tax claimed.
Case study 1: Mileage allowance of 45p per mile
Tony has his own car, which is a petrol model with a 1600cc engine. His employer pays a mileage allowance of 45p per mile.
His employer is registered for VAT. In the quarter from 1 January 2020 to 31 March 2020, Tony undertakes business mileage in respect of which mileage allowances are paid, as follows:
|
Month |
Business mileage in own car |
Mileage allowance @ 45p per mile |
|
January 2020 |
600 miles |
£270 |
|
February 2020 |
520 miles |
£234 |
|
March 2020 |
800 miles |
£360 |
|
Total |
1,920 miles |
£864 |
Tony’s total business mileage for the tax year is 9,600 miles.
From a tax perspective, as the mileage allowances paid are not more than the approved amount, they can be paid tax-free and do not need to be reported on Tony’s P11D or payrolled.
From a VAT perspective, Tony’s employer can reclaim VAT based on the fuel element of the mileage allowances. The employer uses the advisory fuel rates to ascertain the fuel element.
The appropriate rates for the period from 1 January 2020 to 31 March 2020 are as follows:
|
Month |
Advisory fuel rate for 1600cc petrol car |
|
January 2020 |
14p per mile |
|
February 2020 |
14p per mile |
|
March 2020 |
14p per mile |
The rates applying for January and February 2020 are those for the quarter from 1 December 2019 to 29 February 2020 and the rate applying for March 2020 is that for the quarter from 1 March 2020 to 31 May 2020.
Having ascertained the fuel rates for the period, the approach is as follows:
- Multiply the business mileage for the period by the advisory fuel rate for the period to ascertain the fuel element of the mileage costs.
- Multiply the fuel element as determined in (1) above by the VAT fraction of 1/6 to arrive at the input VAT to be reclaimed.
In this, the input VAT is determined as follows:
|
Month |
Mileage |
Advisory fuel rate (per mile) |
Fuel element of mileage allowance |
Associated input tax (1/6th of fuel element) |
|
January 2020 |
600 miles |
14 pence |
£84 |
£14 |
|
February 2020 |
520 miles |
14 pence |
£72.80 |
£12.13 |
|
March 2020 |
800 miles |
14 pence |
£112 |
£18.67 |
|
|
1,920 miles |
|
£268.80 |
£44.80 |
1,920 miles
£268.80
£44.80
Tony’s employer can reclaim input VAT of £44.80 in respect of the mileage payments made to him in the quarter to 31 March 2020. His employer will need to repeat the process for all employees who use their cars for business and to whom a mileage allowance is paid.
Case study 2: Mileage allowance of 11p
Julia has a company car. She pays for her own petrol and claims a mileage allowance from her employer. Her employer pays the allowance at advisory fuel rates.
Her company car is diesel with an 1800cc engine. In the quarter to 29 February 2020, she undertakes 1,000 business miles, for which she receives mileage payments of £110 at the advisory fuel rate of 11p per mile that applies for that quarter to a diesel car with an engine size of between 1601cc and 2000cc.
As the advisory rates are fuel-only rates, the associated input VAT is simply 1/6th of the allowance paid to Julia – in this case £18.33 (i.e. £110 ÷ 6). Her employer can include this in the input tax reclaimed in the quarter to 29 February 2020.
Short cut
The advisory rates are fuel-only rates and where these are used as a basis for reclaiming input VAT on mileage payments, the calculation can be simplified by multiplying the business miles in respect of which a mileage payment is made by the VAT element of the advisory rate (i.e. 1/6th of the advisory rate).
The following table shows the associated input VAT for the advisory rates as they apply from 1 March 2020.
|
Engine size |
Petrol |
Petrol – input VAT |
|
1400cc or less |
12p per mile |
2p per mile |
|
1401cc to 2000cc or less |
14p per mile |
2.33p per mile |
|
Over 2000cc |
20p per mile |
3.33p per mile |
|
Engine size |
Diesel |
Diesel – input VAT |
|
1600cc or less |
9p per mile |
£1.50 per mile |
|
1601cc to 2000cc |
11p per mile |
£1.83 per mile |
|
Over 2000cc |
13p per mile |
£2,17 per mile |
Case study 3: Mileage rate of 50p per mile
An employer pays a mileage rate to an employee who uses their own 1200cc petrol car for business. The rate paid is 50p per mile. In the quarter to 31 May 2020, the employer pays mileage payments for 300 business miles.
The associated input VAT is (from the table above) 2p per mile. The employer can reclaim input tax of £6 (i.e. 300 miles @ 2p per mile) for the quarter in respect of the mileage allowances paid.
Practical tip
Don’t forget to claim back input VAT on the fuel element of mileage payments made to employees who use their own or a company car for business journeys. As long as the mileage allowance paid is at least equal to the advisory fuel rates published by HMRC, input VAT can be reclaimed at a rate of 1/6th of the appropriate advisory rate for each business mile for which a mileage rate has been paid. Remember to keep records.
