Car Fuel and VAT - Your Options

With car fuel having leapt in price in recent months, the amount of VAT which can be recovered on fuel used for business purposes is also rising.

There are three ways in which car fuel can be dealt with for VAT purposes:

1. The Scale Charge
If fuel is provided for motoring which includes private motoring, a ‘fuel scale charge’ is paid to HM Revenue and Customs (HMRC) as additional output VAT when the VAT return is submitted. This system favours businesses with employees who do quite a lot of private mileage.

2. The Strict Method
In this system, a detailed mileage log is kept and VAT on private mileage is not claimed. The total VAT on fuel is worked out and only the business proportion is claimed. This system necessitates keeping detailed and accurate records, which can be onerous, but is normally the best method to use.

3. Do Not Claim VAT
A scale charge is not applied where there is no claim of input VAT on fuel. This system may suit businesses with very low business mileage.

However, an alternative method is applicable which can be efficient for many businesses. In this case, the employee pays the cost of fuel and provides a record of business mileage done. The employee must provide the VAT receipts for their fuel purchases. Using this method allows the employer to reimburse business mileage at the rates below and to claim the VAT element (7/47 of the payment made) as input tax.

The rates currently applicable are

Car Fuel VAT Rates

Engine Size	Petrol	Diesel	LPG
1400cc or less	11p	11p	7p
1401-1999cc	13p	11p	8p
2000cc plus	19p	14p	11p

The payment made to the employee is effectively tax-free in his hands. If a dispensation is obtained from HMRC, no return of expenses paid to employees needs to be made.