Reclaiming VAT on business mileage expenses

Reclaiming VAT at the best of times seems complicated, but it is always welcome when it is possible to do so.

If you are a VAT registered business paying mileage expenses to you or your staff, you can claim back VAT on the fuel-only portion of the mileage expense – but you must collect VAT receipts for fuel purchased to back up the claim.

The HM Revenue & Customs (HMRC) tax-free approved mileage allowance is 45p per mile for the first 10,000 miles in the financial year, reducing to 25p per mile thereafter.

An employee (or business owner) who uses his or her own car for business travel can claim mileage at the relevant amount.

HMRC says that the claim for using your own car not only covers fuel, but it also covers wear and tear and other running costs.

This reduces at 10,000 miles because HMRC says that you have had enough contribution to the running costs to compensate you for using the car for business.

To work out the VAT on fuel you need to know HMRC’s advisory fuel rates for the vehicle to figure out how much can be claimed (be aware that the advisory rates change regularly).

The advisory fuel rate is inclusive of VAT, so for example, take VAT at 20 per cent and advisory fuel rate of 21p per mile for 100 miles.

The gross amount would be £21, which would equal 120 per cent of the fuel cost, so the VAT element is calculated by dividing the amount by six, thus the VAT mileage amount you can reclaim would be £3.50 for the 100 miles covered.

The formula for calculating the VAT on mileage is:

  • Take the fuel advisory rate and multiply it by the number of business miles claimed. This gives us the total fuel amount.
  • Take the total fuel amount and multiply it by the VAT fraction. The VAT rate is currently 20 per cent so the VAT fraction is currently 20/120 which can be reduced to 1/6th.

This gives the following formula:

  • VAT = (Fuel Advisory Rate x Business Miles) / 6

It is different for electric cars where the advisory electricity rate for fully electric cars is just 4p per mile.

The advisory electricity rate for fully electric cars is calculated using published consumption rates, adjusted to reflect real driving conditions and the average cost of electricity.

Hybrid cars are treated as either petrol or diesel cars for advisory fuel rates.

An example based on the advisory rates published by HMRC.

  • If you drive 50 miles a day on business, it is roughly 3,000 miles a quarter. If your car has a 2.5-litre petrol engine, then you can claim VAT on the fuel of £95 per quarter.
  • The Advisory Fuel Rate for this quarter and this car (2.5-litre petrol engine) is 19 pence per mile
  • The mileage is 3,000 miles
  • Fuel portion of mileage claim = 19p x 3,000 miles = £570
  • The VAT on mileage is £570 / 6 = £95

Your business is treated as having made VATable purchases of fuel of £570 (inclusive of VAT) and your VAT bill for the quarter is reduced by £95.

Fuel receipts need to be kept for the value of £570. HMRC insists that you have enough petrol receipts to cover the full amount of the claim.

If you need advice on reclaiming VAT on business mileage please speak to our experienced team.