If your business pays for fuel for work and private journeys, there are different methods to work out the VAT reclaimable. There are further complications
if your business is partially exempt.
Until 2014 if a business paid for road fuel for its owners or workers which they used for business and private journeys, it was expected to reclaim none
of the VAT or all of it. If it opted for the latter, it had to account for VAT on the private use using HMRC’s scale charges. Some businesses did well
out of the arrangement while others did badly. These days while the scale charges still exist and continue to be used, you can instead work out the
amount reclaimable on fuel costs by applying the general VAT rules. These say you can use any fair and reasonable method of apportioning the VAT between
business (reclaimable) and private (not reclaimable) use.
Scale charge pros and cons
One advantage of HMRC’s scale charge is that it’s simple to use. The drawback is you can end up paying too much VAT. As a rule of thumb, the less fuel
paid for by the business the less likely it is that the scale charge will be the most VAT-efficient option. To use the apportionment method instead
you’ll need to keep a record of business and total mileage for each car for which the business pays for fuel.
For each return period you can choose which method to use and opt for the most VAT efficient. What’s more, you can use different methods for each car for
which your business pays the fuel.
If you want to work out the most VAT-efficient method, and your business is partially exempt, you’ll need to consider another factor. You must decide if
the cost of fuel is attributable to taxable or exempt supplies your business makes, or both. In virtually all cases car journeys will be for the business
as a whole and therefore the VAT on the fuel falls in the last category. This is known as the “residual VAT” or “residual input tax”. You can now decide
whether to claim/account for VAT using the scale charge or by apportionment.
You can change methods each VAT period and for each car for which your business has bought fuel. The options are to pay HMRC VAT based on its scale charges
or account for private mileage. If your business is partially exempt you must reduce your claim according to the partial exemption rules. The scale
charge can be similarly reduced.