It’s not well known, but employers can reclaim VAT on more than just the fuel element of the mileage allowances paid to their workers. What’s involved?
For a long time, companies have been allowed to pay employees flat rate tax-free mileage allowances for business travel: 45p for the first 10,000 miles and 25p thereafter. Since April 2013 partnerships and self-employed individuals can claim similar flat rate tax deductions. HMRC would have you believe this simplifies your bookkeeping. We don’t agree.
No records needed?
HMRC says that where you claim the mileage allowance you only need to keep a record of where you travelled on business and the distance - no more keeping petrol receipts, service bills, etc. Three cheers for HMRC! What it fails to mention are the consequences of this on your VAT bill. Without invoices or other evidence of VAT you’ve paid, you aren’t allowed to reclaim it.
Tip. You should ignore HMRC’s advice and continue to keep records of motoring expenses, service bills, car washes, etc. so that you can reclaim the VAT on these. Companies should also ask their directors and employees to do the same.
Can I really claim back VAT?
Reclaiming VAT on actual motor expenses while getting a deduction against your profits for the full flat rate allowance sounds like having your cake and eating it. After all, where you claim tax deductions from your profit for actual motor expenses you reduce your claim by any VAT you reclaim. However, the good news is that HMRC’s guidance says the simplified (flat rate) deduction “does not affect existing VAT rules and practices” . So you can eat your cake with HMRC’s blessing.
What can be claimed?
The rules are generous for partners and self-employed individuals; not only can you reclaim VAT on the cost of fuel used for business, but also 100% of the VAT on repairs, servicing, etc. No scaling down is required if you use your car for personal journeys.
What can companies claim?
The VAT position is a little trickier for companies. Motor expenses, such as fuel, repairs, etc., will usually be supplied to and paid for by the director or employee who owns the car. And, as you probably know, VAT can only be reclaimed by the person to whom the supply was made.
Tip 1. Special rules mean employers reclaim VAT on the part of a mileage allowance paid to directors or employees that relates to their fuel costs. For example, if over the course of a year a director claims a mileage allowance for 10,000 business miles at 45p per mile, of which the company estimates 16p per mile relates to fuel, it can reclaim the VAT on that, i.e. £267.
Tip 2. While Tip 1 might not be news to you, it might surprise you to know that employers can reclaim the business proportion of VAT a director or employee incurs on other car expenses, e.g. servicing and repairs. HMRC likes to keep this tax-saving tip close to its chest. But once again its own guidance manuals give the game away.
Whilst these savings may seem small, when accumulated over a period of time they can be substantial.