Tax & Accounting News
VAT on employee mileage claims - new rules
01/01/2006
HM Revenue and Customs have changed the rules that govern how businesses
claim VAT back on business mileage allowances paid to employees.
The change affects the situation where employees purchase fuel themselves
and then make an expenses claim based on a mileage allowance or their
actual fuel costs.
From 1 January 2006, this claim must be supported by a garage VAT receipt
in order for the employer to be able to reclaim the VAT back on the
fuel element of the expenses reimbursed. A proper VAT receipt will
be required. A debit or credit card slip, which most people are routinely
given at the garage, is not sufficient.
Which employees are affected by the new rules?
The change affects those employees driving company cars, as well as
those employees who claim a mileage allowance for driving their own
cars for business journeys.
The changes do not affect employees who buy their fuel using an employer-provided
fuel card, credit or debit card or a garage fuel account, where garage
VAT receipts are already required to support a claim.
What do the VAT receipts have to cover?
VAT may only be reclaimed on the cost of fuel for business use and
the receipts only need to cover this amount.
Company car drivers who are paid a fuel-only rate will need VAT receipts
to at least cover the full amount of the mileage expenses claimed.
Where employees are paid a rate per mile, for example 40p, for using
their own car for work, the fuel element included in these expenses
is between 9p and 16p per mile. VAT receipts will only be required
to cover the fuel element of the expenses. Therefore, if 100 miles
at 40p per mile are claimed (£40), the VAT receipts submitted
need to be for say £12, where your business reclaims the VAT
at an average rate of 12p per mile.
The VAT receipts should be retained as proof of purchase. These receipts
will generally be less detailed garage VAT receipts which employees
obtain from garages.
The fuel prices per mile rates (the ‘fuel element’ above)
used to determine the business fuel cost remain unaffected. Customs
publish their own rates but also accept rates set by recognised motoring
agencies, for example, the RAC, AA etc.
To summarise, the only practical change to the current system is that
VAT receipts must be kept to support the VAT claim on business mileage.
It is important that these receipts are kept in the same way as those
for other business expenses.
The changes come into effect from 1 January 2006, regardless of the
VAT return period end date. Whilst HM Revenue and Customs have acknowledged
that businesses will need a little time to make the necessary changes
to their systems, so as to hold VAT receipts in support of all of fuel
claims, internal procedures should be amended as soonas possible.
Are there any other practical considerations?
• HM Revenue and Customs accept that the amount of the VAT receipts
in many cases will not match the VAT reclaimed in respect of business
fuel in any one claim period and that receipts may cover more than
one period, particularly where fuel is purchased towards the end of
a period. However, the receipts must always at least cover the amount
of VAT reclaimed.
• A claim cannot be supported by a VAT receipt which is dated
after the dates covered by the claim. This means, in practice, that
it may be advisable to arrange for employees who use, or may use, their
cars for business purposes to retain all their garage VAT receipts.
This will ensure that, at the end of the claim period, the value of
business fuel is covered by receipts.
• These VAT receipts will need to be kept in the same way as all
other VAT receipts. HM Revenue and Customs may well review these receipts
in years to come and failure to keep them could result in business
mileage VAT claims being disallowed. Consequently, interest, penalties
and a repayment to HM Revenue and Customs could become due.
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