Claiming VAT on the 45p mileage allowance fuel element

One of the questions we get asked most frequently is whether you can claim VAT on the fuel element of mileage when either you or your employees are claiming the HMRC mileage allowance.

Well, if you're an owner managed business and you, or your employees, claim the approved mileage rate, then the good news is that yes, if you're VAT registered and not using the flat rate scheme, you can claim VAT on the mileage allowance.

However, how to do this in practice can be a little complicated.​

So here goes...

HMRC publish approved mileage rates which can change - although at the time of writing this there's only been one increase in 14 years (don't shoot the messenger!).

To find the current rates just go here.​

An employee (or business owner) who uses his or her own car for business travel can claim mileage at the relevant amount (for a car it's currently 45p up to 10,000 miles and 25p thereafter).

(By the way, if your employer pays you more than these rates then you'll get taxed on the difference and if your employer pays less than you may be eligible to claim tax relief.)​

If you have a company car but pay for your own fuel and reclaim mileage from your employer, then HMRC publish advisory rates for how much you can claim.​

Now here's the clever bit.

HMRC say that the 45p per mile (or 25p) that you can claim for using your own car, not only ​covers petrol but it also covers wear and tear and other running costs.  (This reduces at 10,000 miles because HMRC say that you've had enough contribution to the running costs to compensate you for using the car for business! )

And you can claim VAT on the petrol element of the 45p/25p.

So how much is the petrol element?  Well, you can use the ​advisory rates published by HMRC.

So, at the time of writing this blog (remember to check HMRC's current rates), if you've got a petrol car which is 1600cc , then you can claim 16p of the 45p as fuel. 

​The 16p is VAT inclusive so you need to work backwards to find out the VAT claimable. 

So 16p represents 120% (100% plus 20% VAT).  So the VAT element is 16/120*20 = 2.67p.  So for every business mile you claim 45p for, you can reclaim 2.67p VAT.

OK, now let's put some numbers to that:

Say you were claiming 100 miles at 45p for your 1600cc petrol car.

The total claim would be £45 (100 miles at 45p).

The petrol element would be £16​ (100 miles at 16p) and the VAT claimable on the petrol element would be £2.67 (100 miles at 2.67p).

There is just one thing you need to be aware of.

HMRC insist that you have enough petrol receipts to cover the amount of the claim.

So if you're claiming £2.67 worth of VAT, you need to have petrol receipts amounting to £16.​

How you put this through your bookkeeping ​depends on what system you're using.

We advise most of our clients to use Xero or FreeAgent (they're included in our WorkSmart package) - and posting your mileage correctly is a walk in the park!​

This is how it would look in Xero:​

Now we haven't talked about making sure that your journey is a valid business journey in the first place, or, if you're a sole trader or in a partnership, whether you should be using the 45p per mile allowance or claiming for your car costs totally differently.

And if you're trading as a limited company, you might want to look at our blog covering at the pros and cons of buying your car through your limited company.

Those topics need careful thinking about and we'll look at those in a future blog!​

And if we can be of help in any way, feel free to get in touch.

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