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One of the most complicated areas of VAT and tax deals with vehicles, and the fuels that they run on. But as always with tax law, just because it’s confusing, it doesn’t mean you can ignore it!

So, in this post we look at the issue of fuel and vehicles, and whether you can claim back the VAT you spend getting from A to B. If you’re brand new to using a car in your business, and you’re wondering where to start, our explainer video has a few pointers.
 

 

The golden rule of 100% business use

Probably the easiest situation is where you are able to claim back 100% of the VAT you pay for fuel. Just bear in mind that you can only do this when the vehicle has been used solely for business purposes.

The problem here, is that you need to be able to show there’s no way the vehicle is used for private trips.

 
This includes driving to and from work, so it would need to be left at a depot or the office car park overnight. Whilst difficult (and probably sometimes inconvenient) this is not impossible.

For example, a company which repairs phone lines may have a specialist vehicle that carries and installs telegraph poles. It would be a fair bet that this is unlikely to be used to do the school run! In that case, a claim for 100% of the VAT on fuel is likely to be acceptable.

However, where a member of staff has a company car, it can be difficult to convince a tax inspector that absolutely no private journeys occur. If that is the case, then you’ll need to use one of the following methods.

Fuel and VAT – Actual use basis

When you provide company cars for your employees, you’ll be fine if you can show you only claim the VAT on fuel used specifically for business purposes. Typically, this involves keeping petrol receipts and a mileage log showing the date, start and finish point, and total mileage.

You’ll need to make a payment for the fuel, but it is important to make sure that this is at a reasonable rate. Otherwise, you could end up with a Class 1 NIC liability, which we explain in more detail in our article about Benefits in Kind.

Using the Advisory Fuel Rates

The best way to do this is with the Advisory Fuel Rates, published by HMRC. These give a standard amount that you can pay per mile, and they are adjusted depending upon the size of engine and type of fuel used.

The good news is that this works both for the VAT on fuel used for business purposes, and where employees use company fuel for private journeys. If we think about an employee who has a company car and pays for the fuel:

Alternatively, the company could pay for the fuel, and then charge the employee for the number of private miles they do, claiming VAT on the cost of the fuel minus the employee contribution.
 
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Scale fuel charge

The fuel scale charge is based on the emissions of the vehicle in question. There’s a handy calculator online, but you will need to know your CO2 gm.

In this case, the company claims for 100% of the fuel it buys for its vehicles, but it also makes a deduction for the fuel scale charge.

As an example

A BMW 318i with a CO2 rate of 146 would attract a car fuel surcharge of £277.00 a quarter (based on the rates for 2021 to 2022). This is made up of the basic charge of £230.83, plus £46.17 VAT.

The company would be able to claim the net cost of all of the fuel it pays out against corporation tax, less the £230.83. It would also be able to enter all the VAT on the fuel in its VAT return, less the £46.17.

The scale rate bears no relation to the number of miles driven, so for some companies, this may be a better option.

It is important to note that unlike many HMRC rates and allowances, the fuel scale charge gets updated regularly. It is vital to make sure you are always using the latest rate!

Don’t claim any VAT

The final option is to decide not to claim back any VAT at all. For many companies, this may seem ridiculous, but we are all different.

A business may not have any vehicles and only hire a car once a year, or it may have a vehicle that doesn’t travel many miles.

In these cases, it is entirely possible that the directors will decide that the time it takes to calculate the VAT claim is actually worth more being spent on something else!

Be consistent with fuel VAT claims

There is an important rule that you need to bear in mind when it comes to fuel VAT claims, and this is especially relevant with regards to the last point.

You must use the same basis to calculate your mileage rates across all of your vehicles.

 
So, you can’t decide to use the scale fuel charge on delivery vehicles, and then not bother to calculate the fuel figures for a car. It’s why it’s so important to choose a method which is right for the whole company, and not just one individual or a particular vehicle.

Example use cases of fuel and VAT

So practically speaking, when would you use these methods? We can’t hope to give you an example of every situation, but here are some possible use cases.

The taxi owner

The taxi owner has four cars, all of which she operates from a lock-up garage. She drives to the garage, opens up, and then her drivers turn up for work and are allocated a car. The mileage is logged using software for every trip, and no personal journeys are taken. The owner and all of her drivers use their own vehicles to get to and from the lock-up garage.

In this case the 100% claim method would be suitable as the owner can clearly show that the fuel is used for 100% business purposes.

The graphic design artist

The graphic artist works almost all the time from a marketing studio in the centre of town. She travels to work by bus and only occasionally goes to meet clients in a company vehicle. The mileage is negligible and hardly worth claiming for. The company only has one vehicle.

In this situation, it may be better for the company not to bother claiming, as it may take longer to work out the numbers than it is worth. However, if the method of working or the number of vehicles changes then they may need to re-evaluate.
 
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The in-home carer

The in-home carer uses a company car to travel to different clients’ houses and provide for their care needs. He is on the road most of the day and only occasionally uses the car to pick up his child from school if they fall ill. The company pays for all of the fuel in the car.

In this example, it may be better for the company to simply make a charge at the advisory rate for the few personal miles that the carer does, on the odd occasion that he uses the vehicle for personal trips.

The installer

The installer spends most of his days working on-site for clients, installing and maintaining equipment, as do a large number of his colleagues. He uses a company car for these journeys, but as he starts early in the morning, he takes it home so that he can be on the road as soon as possible. The installer has free use of the car at weekends. Sometimes he takes many trips, and sometimes none at all.

The company should think about paying the scale fuel charge in this case, as a way of reducing the administration needed across the whole of the company.

Don’t lose out

Did you know that you could reclaim VAT for up to four years after your VAT return? If you haven’t been reclaiming VAT on your fuel payments, then maybe now is the time to consider your approach.

We appreciate that there is a lot to think about and as we have seen above, you need to choose the right method for your particular situation.

Learn more about our online VAT accounting services, and call 020 3355 4047, or get an instant online quote.

About The Author

Beth-Anne Bruce

I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.

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