Motoring Expenses Part - 2

It is important to note that this article relates to expenses incurred in relation to the running of a motor car.

Hire and leasing charges

The basic rule is that 50% of the VAT incurred on the hire or leasing of a motor car is subject to an automatic input tax block. The remaining 50% of the VAT is recoverable by the business according to the normal rules.

There are three main circumstances where this input tax block does not apply.

(1)If a car is hired specifically for business purposes (and not simply to replace another vehicle which is temporarily off-road) for not more than ten days. This ‘relief’ for short term vehicle hire is a concession from HMRC rather than being part of VAT law, and is confirmed in?Notice 700/64 para. 4.4.

(2)If, had the car been purchased or imported, the input tax block on car purchases would not apply, i.e:

?the car is used either exclusively for business purposes or primarily for a relevant purpose (see previous article in?Issue 90?for the definition of these terms); or

?the car is unused and is supplied on hire to a person who will make zero-rated supplies under the Motobility scheme.

(3)If the car is not a ‘qualifying car’, i.e. it was hired from a lessor which not qualify for full input tax recovery in respect of the car concerned. This should be evident from the lessor's invoice because it is a legal requirement that lessors endorse their invoices to confirm whether or not the car is a ‘qualifying car’.

Repairs and maintenance

If a vehicle is used by a business, VAT on repair and maintenance costs may be treated as input tax if the work carried out is paid for by the business. This includes VAT on repair and maintenance costs incurred by an employer on an employee’s private car, provided the costs of the repair are actually paid by the employer and included in their accounts. ‘Paid by the employer’ includes reimbursing the employee on receipt of an expense claim.

The appropriate partial exemption calculations should be done, but for a fully taxable business input tax incurred on repairs and maintenance can be claimed in full even if:

1. the vehicle is partly used for private motoring; and/or
2. no VAT is reclaimed on road fuel in order to avoid the scale charge (see below).

See?HMRC Manual VIT54500?and?VAT Notice 700/64 para. 5.1?for confirmation of HMRC policy.

Repairs paid for under an insurance policy

If a car is repaired under an insurance policy it is normally the case that the insured party arranges for the repair and then claims reimbursement from the insurer.

In the case of repairs paid for by a business, VAT incurred on the repair costs is input tax in the same way that VAT incurred on non-insured repair and maintenance costs is. Because an insurance policy only covers the losses incurred as a result of an event, insurers usually only pay the net cost of the repair, i.e. if a repair costs ￡1,000 + ￡200 VAT, the insurer pays the business ￡1,000 on the assumption that the business recovers ￡200 from HMRC.

Partially or fully exempt businesses, which cannot recover all/any of the VAT incurred on a repair may need to contact their insurer to arrange for the irrecoverable VAT cost to be reimbursed in addition to the net cost (see?HMRC Manual VIT13500).

Road fuel

VAT incurred on the purchase of road fuel can be recovered as input tax provided it is used for business purposes. Therefore, if fuel is purchased for a vehicle which has wholly business use the input tax is recoverable subject to the business’ overall partial exemption position.

However, if fuel is purchased for a motor car which is used for a mixture of business and private motoring, a VAT cost will arise on the private motoring. This VAT cost is either a restriction of input tax recovery or an output tax charge on private use. Businesses have two options in this regard, either:

(1) keep detailed mileage logs in order that VAT incurred on fuel costs can be apportioned between business and private motoring. Input tax incurred on the private element is not recovered; or

(2) recover input tax incurred on fuel in full and account for output tax on the non-business use by either:

• using the fuel scale charges; or
• calculating the cost of fuel used on non-business journeys.

Because the record keeping needed in order to either apportion fuel between business and non-business journeys or identify and calculate the cost of fuel used on non-business journeys can be onerous (particularly if the business has more than one vehicle), most businesses either do not attempt to recover input tax incurred on fuel at all or they use the fuel scale charges.

Fuel scale charges are a set of standard rates which businesses can use to account for output tax on fuel used for private motoring. They are set according to the CO2?emissions of the vehicle and are updated each year with effect from 1 May. Although use of the scale charges enables businesses to recover VAT incurred on fuel in full, because they are standardised, they do not benefit all businesses. Each business should review its own circumstances and compare the value of the scale charge to the value of fuel purchased to determine whether their use is beneficial.

Road fuel purchased by employees

If an employee makes an expense claim for a fuel expense, the VAT shown on the invoice is recoverable based upon the above rules. Employers must be able to show that the actual cost of the fuel was reimbursed by reference to fuel receipts (Notice 700/64, para. 8.7). In addition, the normal rule that input tax cannot be claimed unless the business holds a VAT invoice applies.

If all of the fuel was purchased for business purposes, all of the VAT incurred is recoverable as input tax. However, the business will need to be able to evidence its business use. As fuel is bought before it is used, HMRC recommend that employees retain all of their fuel receipts (see?HMRC Manual VIT55400?and?Notice 700/64/2014, para. 8.6).

Mileage allowances paid to employees

Many businesses pay motoring costs by reference to a mileage allowance. Mileage allowances are usually set at a level which includes an element of repair, maintenance and insurance as well as fuel. Since 6 April 2011, an employee can be paid 45p per mile by the employer for using his own car for a business trip without incurring a direct tax liability (after the first 10,000 miles in a tax year, the figure falls to 25p per mile).

Input tax may only be reclaimed on the fuel element of the mileage allowance. For example, if an employer pays an employee 30p per business mile travelled and the fuel element of that is 12p per mile, the VAT element of the fuel element of the mileage allowance is 2p. Input tax claims must be supported by a VAT invoice for the fuel purchased.

HMRC publish a table of officially approved ‘fuel only’ rates per mile. They are set according to vehicle engine capacity and fuel type and are updated quarterly.

Use of the HMRC fuel rates is not obligatory. Recognised motoring agencies, such as the RAC and AA, publish fuel cost calculators and their use is usually acceptable, or an employer may undertake their own calculations. Although other methods may give improved input tax recovery, the advantage of using HMRC rates is that the business saves the cost of justifying the use of an alternative methodology to HMRC.

Charging electric vehicles

VAT incurred charging electric vehicles is subject to the same input tax recovery rules as VAT incurred on other expenses, i.e. it is recoverable by the recipient of the supply provided that the recipient receives the supply in the course or furtherance of making taxable supplies. Before considering VAT incurred on charging costs, we will briefly look at the liability of the supply and employee mileage allowances.

Liability of charging

When making an input tax claim for the costs of charging an electric vehicle businesses must confirm the liability of the supply. If a vehicle is charged at a domestic residence it is likely that the electricity would have been subject to the 5% VAT rate. However, electricity supplied to business premises and public charging points is taxed at the standard, 20%, rate.

Mileage allowances paid to employees

HMRC publish advisory rates for electric cars, similar to the advisory rates for road fuel discussed above. As it is only 5p per mile the amount of VAT potentially recoverable on the costs of charging the vehicle for business use is minimal (1/6th of 5p per mile is 0.0083p per mile). It is unlikely that it is worth making an input tax claim in these circumstances. The requirement to support claims for input tax with VAT invoices applies to claims for VAT incurred on electricity just as it does to VAT incurred on other fuels and VAT cannot be claimed on an employee’s domestic electricity (see below).

VAT incurred charging at business premises or public charging points

VAT incurred on charging an electric vehicle at business premises or a public charging point is recoverable in the same way as VAT incurred on road fuels i.e. either input tax recovery is restricted to reflect private mileage or the input tax is recoverable in full provided that the business accounts for output tax on private use.

VAT incurred charging at a domestic residence

The only circumstance in which VAT incurred charging a vehicle at a domestic premises can be recovered is if it was incurred by a sole proprietor who charged the vehicle at their home and uses it for business purposes (see HMRC Brief 07/2021 for confirmation of HMRC policy).

As the amount of VAT claimed must be justified to HMRC, sole proprietors may well consider that apportioning their domestic bill between electricity used for their business vehicle and that used for other purposes, and then apportioning the electricity used by the vehicle between business and private mileage, is too onerous to justify making the claim.

Conclusion

Other than VAT incurred on vehicle hire, which is subject to the 50% block, all other VAT incurred on motoring costs is recoverable according to the normal rules, ie, the business must have incurred the expense for a business purpose, be making taxable supplies and have evidence to support the claim.

In respect of VAT incurred on road fuel and charging expenses, quantifying private use and evidencing input tax claims can be onerous. Therefore, unless the fuel scale charges can be used, it may be more cost effective for many businesses to not recover VAT incurred on fuel or charging costs.