All input tax claims must be evidenced. This requires the business to hold a VAT invoice for the expense and to be able to justify the extent to which it was used for a business purpose.
VAT on repair and maintenance costs may be treated as input tax if:
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:
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.
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, if the insured party is VAT registered, insurers tend to 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 it can recover £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
If a business incurs VAT on-road fuel, this can be treated as input tax provided it is used making business journeys. If the car has wholly business use all of the VAT as input tax and it is claimable according to the business’s overall partial exemption position.
However, if the car has 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 can deal with VAT incurred on fuel costs in one of three ways:
3.1.1 Apportion fuel between business and private use
Businesses can apportion VAT incurred on fuel between business and private motoring and only treat the business element as input tax. This requires detailed mileage logs to be kept in order that the VAT incurred on fuel costs can be divided and the VAT incurred on the private element not recovered. As the record keeping required is onerous, in practice this method is only really appropriate for businesses that have very few staff.
3.1.2 Apply fuel scale charges
As an alternative to apportioning the input tax, the business could, instead, recover all of the input tax incurred on fuel in full and account for an output tax charge on the private use element.
The value of the private use can be calculated by using either:
The advantage of the standard rates is that they are simple and straightforward to apply. However, because they are standardized, they may 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.
It is permissible for the business to calculate the value of fuel used on private journeys using another method. However, HMRC expect that other methods will produce an accurate open market value for the fuel, you cannot make a nominal charge. The administration costs of the record keeping necessary to justify the value of the fuel are such that, in practice, very few businesses adopt this approach.
3.1.3 Do not recover VAT incurred on fuel
Many businesses choose to not recover VAT incurred on fuel expenses because the costs of making a claim exceed the amount of VAT recovered.
The administration costs associated with apportioning fuel costs can be considerable and, because fuel scale charges are standardized, they do not benefit all businesses.
Whether or not VAT is claimed on fuel does not affect whether or not VAT can be claimed on other costs associated with running a motor car, such as repairs, maintenance, or leasing.
3.2.1 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.
Therefore, the business will need to be able to evidence the business use of the fuel and, if the fuel is used partly for business and partly for private motoring, either keep records to justify an apportionment or apply the fuel scale charges.
Employers must be able to show that the actual cost of the fuel was reimbursed by reference to fuel receipts. In addition, the normal rule that input tax cannot be claimed unless the business holds a VAT invoice applies. As fuel is bought before it is used, HMRC recommends that employees retain all of their fuel receipts.
3.2.2 Mileage allowances paid to employees
Mileage allowances are usually set at a level that 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 traveled and the fuel element of that is 12p per mile, the VAT element of the fuel element of the mileage allowance is 2p.
If the employer recovers VAT incurred on the fuel element of private mileage, output tax should be accounted for using the fuel scale charges.
Like all input tax claims, a VAT invoice for the fuel purchased must be held.
HMRC publishes a table of officially approved advisory fuel 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. Recognized 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.
In summary, the same rules apply to electric motor cars as to those which use standard fuels:
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. This rule applies differently depending on how the charging cost is incurred.
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.
Unless the vehicle has exclusively business use, the record keeping required to justify either an apportionment or the value of the private use is likely to be onerous. Unlike the situation with road fuel, HMRC do not publish standardised scale charges which can be used to value private use of electricity.
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.
It is not possible for VAT to be claimed on domestic electricity used to charge a vehicle at an employee’s residence because the electricity was supplied to the employee and not to the business.
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.
HMRC publish an advisory rate for electric cars, similar to the advisory rates for road fuel discussed above. As it is only 4p per mile the amount of VAT potentially recoverable on the costs of charging the vehicle for business use is minimal (1/6th of 4p per mile is 0.0067p 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 above)
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