Employees and directors of a business can be reimbursed for the business miles they travel in each tax year. For the 2011/12 tax year, HMRC has published rates of 45p per mile for the first 10,000 miles they travel, followed by 25p per mile for all miles thereafter. If you reimburse your employees at the HMRC published rates (or lower), no taxable benefit occurs.
The 45p and 25p rates are intended to cover all costs involved in an employee using their personal car, both capital and running costs. You should note that if you do pay mileage, you should not pay any other costs relating to that vehicle, such as fuel, servicing, insurance, etc.
If you are a VAT registered business, HMRC allow you to reclaim VAT on the fuel element of the allowances.
So how do you calculate how much VAT you can reclaim?
The amount of VAT you can recover depends the engine size and the type of fuel the car uses. HMRC issue advisory fuel rates which show how many pence per mile can be attributed to fuel costs.
These rates are revised every quarter to reflect changes in fuel prices. They can be found on the HMRC website by following the link below. If the link does not work, you can copy and paste this into your browser.
An example of calculating the amount of VAT you can reclaim is below:
An employee travels business 500 miles in a 1600cc petrol car on 1st September 2011. The employee has not been reimbursed for any other mileage within this tax year.
- The employee can be reimbursed 500 miles x 45p = £225 with no further tax implications.
- The business can reclaim some VAT on the £225. If we look at HMRC's table for a 1600cc petrol car, the advisory fuel rate is 18p for the quarter starting 1st September 2011, therefore:
500 miles x 18p = £90. This is the fuel element, inclusive of VAT.
Whilst the standard VAT rate is 20%, to work out the VAT amount we simply
divide the gross figure by 6:
£90 ÷ 6 = £15 VAT
- So, although the business reimburses the employee the full £225, it can reclaim £15 via its VAT Return.
By using HMRC’s advisory rates, you can be sure that in the event of any investigation, the correct amounts of VAT have been reclaimed.
