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The complete guide on reclaiming VAT on staff expenses

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Reclaim VAT on business mileage

When driving a car for business, you are likely claiming mileage expenses. This means that the business you work for can claim VAT. Or, if you’re a business owner with employees who need to drive as part of their job, you can claim VAT back on their business miles. 

So how does VAT reclaim work for businesses looking to take advantage of this input tax return? This article will explore everything you need to know on business mileage. 

Can you claim VAT on business mileage?

If an employee drives their own car for business, mileage rates are claimed under the HMRC-approved mileage allowance payments. So any business trips or business journeys employees make can be expensed. The VAT that a business reclaims is on the fuel portion of the mileage expense. 

Many employees will usually use their personal vehicle when needing transport for work, and so as long as the company is VAT-registered and not on a flat-rate scheme, they’ll be able to reclaim at the end of the tax year.

The amount that a business can reclaim is down to the cost of fuel only. That’s because the employer pays partly for the fuel as a business expense. Any running costs outside of the fuel for business is the responsibility of the employee.

How do you calculate the fuel portion of business mileage?

Calculating the fuel portion is necessary to know how much small businesses and big corporations should be asking for on their mileage claim. Advisory Fuel Rates are set out by HMRC and relate to the amount paid to the company car drivers that pay for the fuel, using that car for business purposes.

These rates will depend on: 

  • the type of fuel used (petrol engine, diesel engine, etc)
  • the engine size
  • the type of car (electric cars to hybrid cars, for example.)

Claiming VAT on mileage allowance

When you’re looking to claim VAT on mileage allowance, the amount you receive depends on the number of miles. 

The first 10,000 miles for vans and cars can claim up to £0.45 per mile, and then it’s £0.25 per mile after that. This 45p is split into two parts, fuel and wear and tear. The fuel part is the part that a business owner can reclaim.

It’s worth noting that if an employee can take extra passengers, the employer can claim an additional 5p per mile for each passenger taking these business journeys.

As with most goods and services that have this tax, the standard VAT rate is 20%.

What if you’re self-employed or freelance?

In order to reclaim, the person in question needs to be employed by the company. They cannot be contract staff, so for freelancers using their own car, this wouldn’t be possible to reclaim VAT. 

The employee must also be paid a mileage allowance for driving their own vehicle for the business, despite using it for private use. When reclaiming, the mileage used for business is the only element that VAT can be returned on.

If you’re a sole trader, then legally, there’s no difference between you or the business, so you wouldn’t be classed as an employee or be eligible to reclaim on VAT.

What about overseas business mileage?

If your employee is driving overseas for business, then VAT can’t be reclaimed when the fuel is purchased overseas. Only fuel purchased in the UK can be reclaimed under the VAT input tax.

The benefit of electric cars

For those who drive electric cars, the full amount available can be reclaimed. It’s a method implemented to reward those drivers who have chosen to be more environmentally friendly with their mode of transport. This could change in the future as more people make the switch to electric, so make sure to keep an eye on it.

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How to make a VAT reclaim on business mileage 

In order to make a claim for VAT, it’s always important to keep a record of VAT receipts. This is something that should constantly be relayed to your employees where possible and clearly stated in your business travel policy.  

It’s good if you can keep an accurate and updated log of the business travel you have as a company. Things to include with the receipt are the date, the start and end destinations of the trip, the mileage traveled, and the reason for the journey itself.

When it comes to fuel receipts, HMRC recommends holding onto them for four years. The reason for this is that HMRC might at some point ask to see evidence regarding your VAT returns. This can be the case for all tax returns, and so it’s something to remember.

You should also track passengers, but remember you can only claim for passengers who are employed by the same company. You will also have to keep the fuel receipt for all fuel purchases made for any business trips you wish to claim. The VAT amount on the receipt will need to correlate to the amount you want to claim. 

Good to know: HMRC does accept scanned receipts and photos of the receipts as long as the image is clear and you can read all the words properly.

Reclaiming VAT is worth doing for any business

According to RMT’s latest research, they found that UK businesses are losing 12% of their revenue due to not filing a VAT reclaim. That’s a significant chunk of money that could be going back into the business and helping its development and growth. 

Reclaiming VAT is absolutely worth doing for any business nowadays, and with this guide, you should have the knowledge needed to claim back that critical 12% of revenue.