VIT55400 - Motoring expenses: road fuel and the private use of cars
Options for treatment of road fuel costs
If the business pays for the road fuel there are four options for treatment of road fuel costs:
a. Treat all of the VAT as input tax because 100% is used for business purposes
This option would apply to fuel for cars used exclusively for business purposes such as pool cars.
b. Treat all of the VAT as input tax and either apply the fuel scale charges or account for VAT on the basis of amounts charged to the employee
This option would apply for:
- company cars:
- stock in trade cars; and
- taxis and private hire cars
that are used for private as well as business purposes.
If a business makes a charge for the private use of fuel it can opt to account for output tax on the basis of the amount charged to the employee. Or it can opt to apply the fuel scale charge instead of accounting for VAT on the charge made.
Scale charges are changed each year, see Road fuel scale charges for VAT for current and previous accounting periods.
See VIT55700 for more on fuel scale charges.
c. Use detailed mileage records to separate the business mileage from the private mileage
This option would be used if the business does not wish to apply scale charges. Detailed records must be kept to demonstrate that only the business element of the VAT charged on fuel has been treated as input tax.
For example; records show that the total mileage is 4,290, of which 3,165 is business mileage. The total cost of the fuel was £368.
- The cost of the business mileage is £368 x 3,165 / 4,290 = £271.49
- The input tax is £271.49 x VAT fraction (VAT rate divided by 100 + VAT rate)
- The cost of the private mileage is £368 x 1,125 / 4,290 = £96.51
If a business applies other calculations HMRC may check them to ensure that only the element of VAT on fuel relating to business use is claimed.
HMRC may check all the available documentary and oral evidence if a business says that:
- only input tax on business mileage has been claimed; and
- the private element has been excluded from the business accounts.
As the Phillips (G) case shows, the absence of records will generally make it difficult for a business to discharge the burden of proof that private motoring is not being funded by the business. See VIT64690 for more on that case.
d. Treat no VAT incurred as input tax
This option is only available by concession (see Notice 48 Extra Statutory Concessions 3.1).
It allows businesses to choose not to pay the relevant scale charges. If they do this they must not recover input tax on any road fuel bought by the business. Any business that opts to use this concession must do so in respect of all fuel used by it in all vehicles including commercial vehicles.
The concession is aimed at small businesses that operate cars with low total mileage where application of the scale charge would cost more than the loss of input tax. Where HMRC finds that a business has:
- funded road fuel for private use through the business;
- claimed input tax; and
- not paid scale charges
we may assess for scale charges. However, where a business was unaware of the concession, and use of it would have been in its favour, HMRC may disallow input tax rather than assess for scale charges.
It has always been possible in theory for businesses who, say, own a fuel storage tank to abuse the concession. If an HMRC officer believes that a business is abusing the concession they should contact Deductions and Financial Services Team for advice.
Input tax when fuel is purchased by employees
If employees are reimbursed for road fuel they have bought for business purposes the VAT charged can be treated as input tax. This can only be done if the business can show that the employee has been reimbursed either:
- for their actual expenditure; or
- by way of a mileage allowance.
The business must also obtain and retain invoices for all fuel purchased by its employees. This means either full VAT invoices or less detailed invoices. Input tax can only be claimed on the cost of fuel for business use in making taxable supplies so any invoices need only cover this amount.
HMRC accepts that the amount of the invoice in many cases will not match the input tax claim in respect of business fuel in any one claim period, particularly where fuel is purchased towards the end of the period.
Clearly a claim cannot be supported by a VAT invoice that is dated after the dates covered by the claim. This means, in practice, that it may be advisable for employers to arrange for their employees who use, or may use, their cars for business purposes to retain all fuel invoices. This will ensure that, at the end of the claim period the value of business fuel is covered by an invoice.
Input tax when employees are paid a mileage allowance
Input tax is calculated by multiplying the fuel element of the mileage allowance by the VAT fraction (VAT rate divided by 100 + VAT rate). The allowance paid to employees must be based on mileage actually done. Business records must be kept to back this up. The business must retain records for each employee claiming a mileage allowance to 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.
HMRC officers may check what rates employers have used to calculate claimable input tax on the fuel element of mileage allowances paid to their employees. Current rates as published by motoring associations such as AA or RAC are generally acceptable. HMRC will also accept HMRC’s own advisory rates which are published twice a year and can be found at Company Cars - advisory fuel rates.
Some employers cap employees to a particular level of allowance. For example, the employer may decide that employees with cars with engines over 2000cc will receive only the rate paid for vehicles between 1400 and 2000cc. If this happens HMRC will only allow input tax recovery on the mileage rate that the employer has paid to the employee.
For the meaning of employee see VIT43200.
Charges for motoring costs
Sole proprietors cannot make a supply of their own fuel to themselves. As a result they cannot get out of paying scale charges by charging themselves for fuel bought by the business which is used for private motoring. Partnerships, as a business, can make supplies to the individual partners as individuals.
Where the business funds private motoring, the fuel is appropriated by the proprietor as a private individual and the scale charges apply. Sole proprietors can, of course, choose not to fund their private motoring via the business. In that case a business will need to show HMRC that the input tax claimed relates only to business mileage and that none of the cost of private mileage is borne by the business. This would normally be via keeping detailed mileage records.
Partly exempt businesses, road fuel and scale charges
Like any other registered person, a partly exempt business can treat the VAT on road fuel used for private motoring that has been provided free or below cost as input tax and declare 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 supplies, so that fuel bills will be residual for partial exemption. This will result in a restriction to the input tax that relates to the private motoring and 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. This means, for example, that where only 80% of the input tax is recovered only 80% of the scale charge is to be paid.
Where a partly exempt trader 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 trader is to be included in the calculation.
When the annual adjustment is carried out, the scale charge percentage must also be adjusted.
VAT groups and scale charges
The use of the concession of funding private motoring but not claiming back any input tax must apply to the whole of a group registration. But companies may operate separately within the group for other aspects of the treatment of private motoring.
If a VAT group is partly exempt then whether or not the group can operate on a company-by-company basis or as a group in relation to the partial exemption concession will depend entirely on the group’s partial exemption method. In other words, if the partial exemption calculation for recoverable input tax is calculated on a global basis, the same must apply to the scale charges.
Alternatively, if the group has a sectorised method, scale charges may be dealt with in the same way.
Input tax when a business charges employees for petrol used for private purposes
If a business charges its employees for private road fuel at less than cost value the VAT incurred is input tax. The business can opt to apply the fuel scale charge or it can choose to account for output tax on the basis of the amount charged to the employee.