Please note, there has been an update to the VAT on fuel.
The VAT rules that apply where your business pays for fuel using business and personal journeys are changing soon. Most businesses need to revise their procedures; what will this involve?
Where a business pays for fuel it can reclaim the VAT element of the cost in the same way as any other purchase. However, where the fuel is used for non-business purposes, e.g. a director’s personal journeys, special rules apply. Currently, your business can reclaim:
- All the VAT, but account for non-business fuel using HMRC’s VAT scale charge.
- No VAT – this avoids the scale charge.
- VAT on the cost of fuel that’s used for business purposes.
The last option requires you to keep a record of business and non-business journeys for each vehicle. This can be rather fiddly.
Change is coming
Currently, unless you specifically choose to use Options 2 and 3, the scale charge applies by default. However, the VAT return periods that start on or after 1 Feb 2014, that’s changing.
What’s the new rule?
Instead of HMRC’s fuel scale charges, the new Option 1 will mean businesses must pay VAT on the value of the fuel used for non-business journeys. They will, therefore, need to know how much fuel it used for this purpose. In effect, the new Option 1 will be virtually the same as the existing Option 3.
How will it work for companies?
Unless you company doesn’t intend to reclaim VAT on fuel, the new Option 1 will apply by default. In other words, all registered businesses (other than those which use the flat-rate scheme) that pay for fuel and intend to reclaim the VAT on its cost will need to keep a record of mileage for every vehicle.
Tip 1: To reduce record keeping, directors and employees can instead pay for their own fuel and claim from the company a mileage allowance for business journeys at HMRC’s approved rates. Your company will still be allowed to reclaim VAT on the fuel element of the allowance, subject to one or two conditions.
Tip 2: Using Tip 1 will also avoid potential income tax charges that can arise where your company pays for fuel used for personal journeys.
How will it work for other businesses?
Under the new rules, self-employed individuals and business partners ca’t use the mileage allowance arrangement available to directors and employees. They will have no choice but to keep full mileage logs and reclaim only the VAT on fuel costs in proportion to the business use of each vehicle.
So, in effect, the three options currently available are cut to two for VAT return periods that commence on or after 1 February 2014: claim nothing or claim a business proportion.