Most employers use pay mileage allowances to reimburse employees for the cost of petrol incurred on business journeys. When the employee uses his or her own car for the journey, payments can be made tax-free as long as they do not exceed the approved mileage rates (set at 45p for the first 10,000 business miles in the tax year and at 25p per mile for any subsequent business miles in the tax year). If the employee has a company car but pays for fuel, reimbursement can be made tax-free up to the advisory fuel rates published quarterly by HMRC.
When it comes to VAT, input tax is calculated by multiplying the fuel element of the mileage allowance by the VAT fraction – at a VAT rate of 20%, the VAT fraction is 1/6. HMRC accept the advisory fuel rates as representing the fuel element of the mileage allowance. Rates published by the AA and the RAC are also acceptable. Clients should note that HMRC may check what rates have been used to work out the input VAT reclaimable on mileage allowances.
Clients should also note that the mileage allowances paid to employees must be based on actual business mileage. Records should be kept in support of this, showing:
- mileage travelled;
- whether the journey is business or private;
- the cylinder capacity of the vehicle;
- the rate of mileage allowance paid; and
- the amount of input tax claimed.
If the mileage allowance is capped, HMRC will only allow recovery on the basis on the mileage allowance paid, so if all company car drivers with cars with engines in excess of 1400ccs are paid the advisory fuel rate for the 1400—2000cc band, VAT cannot be reclaimed for cars with an engine in excess of 2000cc by reference to the advisory fuel rate for cars with engines over 2000cc.
Written by the Tax Advice Network