In most businesses an element of business travel is involved, employees and employers can be confused about how to reimburse employees (or even themselves) for the fuel they use to travel for business purposes. The guidance I am outlining below only applies to employees using their own cars – company cars have different rules. We are also only dealing with fossil-fuelled cars here (including hybrids) rather than purely electric vehicles (which include electric cars with a small petrol motor to charge the battery to get you home such as the BMW i3).
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Corporate Tax Deductions
This is a tax-deductible expense, which makes (I will use a Limited Company for my examples) up part of the taxable profit at the end of a year – importantly this means that you do not need to make any claims to HMRC in order to get the tax deductions.
In order to get the corporate tax deduction, HMRC requires you to use the official mileage rates. The way to do this is a simple formula:
<miles travelled> x <mileage rate> = <amount to reimburse to employee>.
For example, if I travel 100 miles in a car, I would claim 45 per mile which would mean I would be reimbursed £45 and the company would get a taxable deduction of £45.
Most people who are office-based will find that the above example will apply. Some people, such as mobile workers, or salespeople may travel significant distances every tax year (6 April – 5 April). If it is the case that they travel over 10,000 miles then every mile over 10,000 must be reclaimed at 25p per mile rather than the higher 45p per mile.
VAT and Mileage Reclaims
If your company is VAT registered then you may be able (there are certain conditions which mean you cannot reclaim the VAT) to reclaim the VAT on the mileage reclaim. In order to reclaim VAT, in most circumstances, a VAT receipt for fuel will be required alongside the claim.
You will not be entering this VAT receipt into your accounting records, nor will you reclaim the VAT detailed on that receipt. This is evidence that the fuel used has been purchased ‘VAT paid’.
Frustratingly, the VAT element is not as simple as the Corporate tax deduction. HMRC says that only a certain element of the 45p (being the fuel element, as the whole amount is a combined fuel and wear and tear allowance) is within the scope of VAT – meaning you can claim it back in your VAT return.
You, again, will need a different set of VAT mileage rates from HMRC (https://www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016)
This is to calculate the VAT element of the mileage reclaim – 45p/25p is considered the Gross (or total including VAT) amount of the reclaim.
Furthermore, you will need more information about your car, specifically the cylinder size (usually the engine size but be careful as manufacturers can sometimes round 1,990cc to 2l when advertising) and fuel type (Petrol/Diesel/LPG).
I will use 2 examples here: one petrol and one diesel.
Petrol Car – 1.4l (1,390cc)
If I travel 100 miles in this car, I apply for (with a VAT receipt) and receive my reimbursement of £45 – nothing more to do from an employee/director side here.
The company records this a little differently:
- we need to work out the VAT element of the gross amount :
<number of miles> x <VAT fuel rate> = deemed fuel gross amount inclusive of VAT;
100 x 11p = £11.
- We need the VAT element of this:
<Gross amount> x ( <VAT rate in whole numbers>/ <VAT rate in whole numbers + 100>) = VAT element
£11 x (20/120) = £1.833333 (round up to the nearest penny for VAT)so £1.84.
- split the original £45 into Net (pre-VAT total) and VAT:
Net = £45 – £1.84 = £43.16
VAT = £1.84
Gross = £45.
You should include these on the respective parts of your VAT return by recording the VAT/Net split appropriately in your accounting software.
For completeness, here is the same example with Diesel cars:
Diesel Car – 2.2l (2,100 cc)
If I travel 100 miles in this car, I apply for (with a VAT receipt) and receive my reimbursement of £45 – nothing more to do from an employee/director side here.
The company records this a little differently:
- we need to work out the VAT element of the gross amount:
<number of miles> x <VAT fuel rate> = deemed fuel gross amount inclusive of VAT;
100 x 12p = £12.
- We need the VAT element of this:
<Gross amount> x ( <VAT rate in whole numbers>/ <VAT rate in whole numbers + 100>) = VAT element
£12 x (20/120) = £2.
- split the original £45 into Net (pre-VAT total) and VAT:
Net = £45 – £2 = £43
VAT = £2.00
Gross = £45.
You should include these on the respective parts of your VAT return by recording the VAT/Net split appropriately in your accounting software.
Understanding HMRC’s Mileage Reimbursement Guidelines
- As a matter of course, employees should keep a mileage log – you can only claim for business mileage – this does not include a commute to a permanent place of work. Here our employees tend to go out to client sites for a week or so, so would record each day trip on their expense claim detailing the start and end point of their trip and the miles they are claiming. It would be wise to assume anyone checking your mileage claims will sense check them against Google Maps or an online route planner.
- Mobile workers may want to keep a mileage log diary in their car – a photocopy of the appropriate page attached to a monthly mileage claim is sufficient.
- If you start your journey from home you MUST remove the miles you would usually do to get to work. For business mileage claims, you should assume your starting point is your main place of work. If you are visiting a site that is closer to home than your office is then there is no mileage claim to be made.
- When checking against a route planner, it does not take precedence over the miles travelled. A standard route calculated by a computer, after the event, will not take into account diversions or traffic. But remember that a reasonable route from Heathrow Airport to Gatwick Airport by car would not include a stopover in Glasgow. That doesn’t mean to say that if you were called to Glasgow halfway on your way to Gatwick that you wouldn’t include the additional diversionary miles in your now new mileage claim to Scotland, which google maps wouldn’t reproduce in a route plan.
- Always document your expense claims – they make up part of your statutory accounting records and every tax-deductible expense must have reasonable supporting documentation – any expense that doesn’t may be reclassified as personal expenditure or loans by the tax man.
- If you are reclaiming the VAT, get a VAT receipt for fuel, and make sure it is current. you are trying to support the purchase of the fuel you have used, so a receipt from 2 years ago will not be considered appropriate evidence.
- You cannot mix and match company fuel allowances and employee mileage claims. They are mutually exclusive. If you have a company car with a fuel allowance, you cannot reclaim anything and the tax is dealt with differently. If your company car is unavailable and you need to use a privately owned car, then in that instance this guidance applies to you – you must not reclaim petrol receipts as you may do with your company car.
- Don’t forget that using a car for business purposes falls into a different insurance category – if you only have Social, Domestic, Pleasure and Commuting cover then you are not covered for business travel and are effectively driving around uninsured.
- The mileage allowance covers an element of wear and tear – not just fuel. This is a contribution towards tyre/brake wear, servicing costs, insurance etc.
HMRC have outlined what they consider to be acceptable tax deductions for mileage reimbursements. That does not mean you cannot pay whatever rate you choose (if you pay less then you may have an issue with staff going forward, so I would recommend you consider these to be the minimum rates). You can pay more generous rates, however, you will only get a tax deduction on the proportion of those rates as detailed above. depending on the number of miles and additional generosity, you and your employees may have other tax issues to consider.
The general guidance above is given without prejudice, and should not be taken as advice that applies to your circumstances. Every company/business is different and there are complexities in the rules that I have not covered. Wellden Turnbull Limited accepts no responsibility as to how you use or apply the information above.
All of the points I have outlined above are for guidance on the principles only, the rates used were up to date on the day of writing but you should refer to official sources for up-to-date rates. The advice given is based on the tax rules at the date of writing and may not be updated.
If you want to share my guidance, please feel free to do so using the original link to my website and give me credit for the work.
24/10/2017 – Oli Spevack FCCA ACA, Partner
Wellden Turnbull Limited,
Munro House,
Portsmouth Road, Cobham,
Surrey KT11 1PP
E: o.spevack@wtca.co.uk
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T: 01932 868 444
