An employer can claim input VAT back on the fuel element of the tax free Mileage Allowance and Fuel Allowance. Input tax is calculated by dividing the fuel element of the mileage allowance by 6 (for the current VAT rate of 20%).
Here is some information provided by HMRC:
The allowance paid to employees must be based on mileage actually done. Business records must be kept to back this up. The business must retain records for each employee claiming a mileage allowance to show:
- the mileage travelled;
- whether the journey is both business and private;
- the cylinder capacity of the vehicle;
- the rate of mileage allowance; and
- the amount of input tax claimed.
HMRC officers may check what rates employers have used to calculate claimable input tax on the fuel element of mileage allowances paid to their employees. Current rates as published by motoring associations such as AA or RAC are generally acceptable. HMRC will also accept HMRC’s own advisory rates which are published twice a year and can be found at Company Cars – advisory fuel rates.
Some employers cap employees to a particular level of allowance. For example, the employer may decide that employees with cars with engines over 2000cc will receive only the rate paid for vehicles between 1400 and 2000cc. If this happens HMRC will only allow input tax recovery on the mileage rate that the employer has paid to the employee.
Speak to your accountant for specific advice based on your circumstances before acting on the information above