Don’t miss out on VAT on business motoring

The Issue

Unincorporated businesses and companies can claim for simplified tax deductions on motor expenses. Whilst this is common practise, using mileage allowances can often result in a business losing out when reclaiming VAT – if insufficient VAT records are kept.

Avoiding the trap

Businesses have long been able to pay their employees a flat, tax-free, mileage allowance for business travel. Since April 2013, partnerships and the self-employed have been able to do the same. These rates are generously set at 45p per mile for the first 10,000 miles and 25p per mile thereafter.

To claim tax relief for mileage allowances, HMRC say that a record only needs to be kept of the distance and locations travelled to on business. Therefore, for tax relief purposes alone, petrol receipts, service bills and other proofs of purchase need not be kept. Whilst this may be administratively easier, conversely one cannot reclaim VAT if there is no evidence of what has been paid on purchase.

If a business wishes to reclaim VAT, it is therefore essential that all records of motoring expenses (petrol receipts, servicing costs etc) are kept by both directors and employees.

Recap on VAT that can be reclaimed

Unincorporated businesses:

  • VAT can be reclaimed on the cost of fuel for business.
  • 100% of VAT can be reclaimed on repairs, servicing etc.
  • No scaling down is required, even if the car is used for personal journeys.

Companies:

  • The VAT position is more difficult for companies.
  • Motor expenses usually are paid for by the director or employee who owns the car.
  • Company can claim VAT back on part of mileage allowance that relates to fuel costs and business proportion of expenses such as servicing and repairs.

Summing up

Even though HMRC say that receipts etc need not be kept for the purposes of obtaining tax relief in respect of mileage allowances this advice should be ignored if valuable VAT reclaims are to be made.

 

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