How to maximise VAT recovery on fuel
How to maximise VAT recovery on fuel
HMRC will soon announce updated rates for working out the VAT flat rate charge where your business pays for road fuel used for private mileage. This can result in disproportionately high VAT costs. Is there a cheaper alternative?
Road fuel options
It’s a common misunderstanding that you must use HMRC’s scale charge rates to account for VAT on fuel purchased by your business which is used for private journeys either by you or your employees. There are actually three options:
If you only pay for fuel used for business mileage reclaim all and pay nothing to HMRC.
If you pay or reimburse the cost of fuel used for private and business mileage, reclaim all the VAT and account to HMRC for the cost of fuel for private mileage.
Reclaim all the VAT and account for private mileage using the flat rate charge, also known as the scale charge.
Tip. As a rule of thumb: if your private mileage represents a high proportion of your total mileage, option 2 is advantageous. Conversely, option 2 is advantageous where business mileage is proportionately high. Trap. If you opt to use the scale charge (option 3), you must use it for all cars for which your business pays for fuel.
Scale charge - pros and cons
One of the advantages to using the scale charge is that it requires no tricky record keeping or calculations. What’s more, the same rate applies for a whole year regardless of changes to fuel prices. But, as we’ve already mentioned, this is a drawback compared with option 2 if your private mileage is relatively modest.
Alternative methods - pros and cons
If you want to claim only the VAT relating to business mileage, a record of total and business journeys must be kept for the vehicle. This will be needed for each VAT return.
Tip. You can change the method of accounting for VAT for each return but, remember, whichever method you choose must be applied to all cars.
Tip. While the scale charge only applies to cars, you can use the mileage-based method of accounting for VAT for all road vehicles.
Example 1. Ahmed is employed by Acom Ltd. He pays for fuel using a company credit card. The car is available to Ahmed for business and private journeys. At the end of the VAT quarter he provides details of his business and total mileage. In the quarter ending 30 April 2025 Ahmed’s fuel costs were £900 (including VAT). His business mileage was 6,000 out of 7,000 in total. Acom reclaims 85.7% of the VAT, i.e. £128.55 (£900 x 20/120 x 6,000/7,000).
Example 2. The circumstances are the same as Example 1 except Acom uses the scale charge. It reclaims VAT of £150 (£900 x 20/120) and accounts for VAT of £58.35 on the scale charge (£137 (based on the scale charge for a car with CO2 emissions of 156g/km)). Acom’s net VAT recovery is therefore £91.67. The business mileage method saves Acom more VAT but is more fiddly to use.
Tip. Use our easy-to-use VAT calculator to work out which method is the most VAT efficient
As an alternative to the scale charge you can work out the amount of VAT to reclaim based on the business mileage covered. This tends to be more VAT efficient if the business mileage is proportionately high compared to private mileage. Use our calculator to work out which method is more advantageous for your business.
Team #TaxSwag