VAT Services in Halesowen A significant consideration in the payment of mileage rates to Directors and Employees using their own cars for work related travel and indeed company cars without fuel inclusion is how to calculate the VAT contained in the amounts that have been paid.
First question is whether there is the opportunity to reclaim VAT from car mileage rates?
The simple answer is "Yes", but the solution can be a little complicated so let's start from the beginning:
An employee can use his or her own car for business purposes and is able to claim mileage at an agreed amount (currently 45p per mile for the first 10,000 miles and 25p per mile thereafter). If an employer pays more than this, then the additional amount will be taxed as income. If an employer pays less than this you get mileage relief from HMRC , this seems to be fair. Get reimbursed more than the rate, pay tax on the difference. Get reimbursed less, get tax relief on the difference.
We still awake? (*nudge*)
If you had been given a company car by your employer, and you had to reclaim mileage from your employer (so you paid for fuel yourself), then there are HMRC published advisory fuel rates
for this. These are reviewed monthly and amended periodically.
Now, here's the cool VAT insight. HMRC say that of the 45 pence per mile (or the 25 pence per mile) is to cover many things, not just fuel. This covers the fixed (insurance, road tax) and the variable (wear and tear) running costs of your car. HMRC are saying that if you claim over 10,000 miles you have been reimbursed for the business proportion of the fixed costs of owning a car.
The portion of the 45/25 pence mileage rate that is for fuel is deemed to be those HMRC published advisory fuel rates
on which you can claim back VAT. Woohoo!
So, if we had an employee who had a car with a 1400cc petrol engine, the fuel portion of the 45/25 mileage rate is 15 pence per mile (August 2013):
15 pence per mile represents 120% (100% plus 20% VAT - stay with us)
Therefore 20/120 multiplied by the 15p is 2.5 pence per mile. So for each mile that you pay that employee, you can claim back 2.5p in VAT.
There is one caveat, which in this day and age we don't really understand. We think it's a historical issue:
You will need to show HMRC on request VAT receipts that have enough VAT on them to cover the claim. (We have never been to a petrol station in the UK that is not VAT registered!)
So if 1000 miles is claimed in the VAT period, the total value on the receipts must be as follows:
The VAT reclaim will be 2.5p x 1000 = £25 and the fuel receipts should total £150