Andrew Needham looks at how partial exemption affects the payment of motoring scale charges.
The motoring scale charge is a way of accounting for output tax on road fuel bought by a business for cars that are then put to private as well as business use.
If a business uses the scale charge, it can recover all the VAT charged on road fuel without having to split its mileage between business and private use. The charge is calculated on a flat rate basis according to the carbon dioxide emissions of the car.
If a business doesn’t want to pay the motoring scale charge, it has three alternatives:
- don’t claim back any VAT of road fuel costs;
- keep a detailed mileage log and only claim back the business element; or
- pay a mileage allowance for business journeys.
The main advantage of the motoring scale charge is that it is administratively simple.
The VAT due per the published table of scale charges should be included in the total output tax figure in box 1 of the VAT return. The net amount (i.e., the scale charge for the fuel less the VAT due) should be included in the value of net total outputs at Box 6.
Partly exempt businesses
Businesses that make both taxable and exempt supplies are partly exempt and cannot recover the VAT on the costs relating to making their exempt supplies and a proportion of their overheads.
The only exception to this is if the input tax relating to the exempt supplies and overheads is relatively small and falls within the de-minimis limits (the exempt VAT must be less than £1,875 per quarter, and less than 50% of the total input tax).
So how do these rules interact with the application of the motoring scale charges?
Partial exemption and scales charges
Like any other VAT registered business, a partly exempt business can treat the VAT on road fuel used for private motoring, which has been provided free or below cost, as input tax and recover it in full and then account for motoring scale charges.
If separately identifiable, the VAT in respect of private motoring is fully deductible. This is because it relates to a taxable supply (the scale charges). However, how fuel will be used will not generally be known when it is purchased, and business journeys will normally relate to the business’s exempt business activities as well as its taxable ones, so that fuel bills will be a general overhead for partial exemption purposes as it will not be possible to separately identify the private use. This will result in a restriction to the input tax that relates to the private motoring and produces an unfair result.
In these circumstances, the scale charge may be reduced to equal the percentage of input tax recovered under the partial exemption method. For example, where only 80% of the input tax is recovered, only 80% of the scale charge is to be paid.
Where a partly exempt business apportions non-attributable input tax by means of an output values based pro-rata calculation, the tax-exclusive value of any fuel scale charges payable by the business is to be included in the calculation.
When the annual adjustment is carried out, the scale charge percentage must also be adjusted.
Practical tip
If a business is partly exempt, it will only be able to reclaim a proportion of the VAT on its road fuel costs, but it only has to pay the same proportion of the motoring scale charge.
