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How to reclaim VAT on fuel from employee mileage?

How to reclaim VAT on fuel from employee mileage

When employees (including directors) use their own vehicle for business journeys, the business can reimburse the mileage costs and treat it as an allowable expense for tax purposes. But did you know that you can also claim back the VAT on fuel?

HMRC has published guidance regarding the amount reimbursed. If the amount reimbursed is the approved amount of Mileage Allowance Payments, there is nothing to report to HMRC.

For an employee using his/her own car, it works out at 45p per mile for the first 10,000 miles and 25p per mile thereafter.

Please click here for the guidance:
https://www.gov.uk/expenses-and-benefits-business-travel-mileage/rules-for-tax

How much of the 45p is fuel?

The 45 pence per mile (or the relevant Mileage Allowance Payments) covers the employee’s costs of running the car. This includes insurance, road tax, wear and tear, and fuel.

The fuel part in the 45p depends on engine size and type of fuel used. HMRC publishes the Advisory Fuel Rates and it is updated regularly so it’s worth checking the rates monthly.

It is worth noting that the Advisory Fuel Rate is fixed even if 10,000 miles have been exceeded and only 25p per mile is being claimed.

How to claim back VAT on the fuel part?

Let’s consider the example of an employee claiming 3,000 miles for April 2019. The employee uses a 2000cc engine car running on diesel.

The mileage expense is £1,350 (45p x 3,000 miles) and this is paid to employee.

Using HMRC’s published Advisory Fuel Rates (link below), for a 2,000cc engine car running on diesel, the fuel element is 11p per mile.
https://www.gov.uk/government/publications/advisory-fuel-rates

From the amount paid to the employee, the fuel element is £330. (11p x 3,000)

The fuel element represents the total paid inclusive of VAT, i.e. 120% is £330. Therefore, the VAT amount is 20% working out to be £55 (20/120 x £330).

How does the recordkeeping work?

While for mileage claims you are only required to keep a log, for your VAT records you will need to keep fuel receipts. Your fuel receipts should be at least for the fuel part above.

In the example above, they should total £330.

How does the bookkeeping work?

If you are using Xero, you will need:

  1. Number of miles – from employee.
  2. Relevant Mileage Allowance Payments – from HMRC
    https://www.gov.uk/expenses-and-benefits-business-travel-mileage/rules-for-tax
  3. Advisory Fuel Rates – from HMRC
    https://www.gov.uk/government/publications/advisory-fuel-rates

Xero will actually do the calculation from you. This screenshot will help.

Claiming VAT on mileage

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