This aspect of VAT is poorly understood by most traders and it is small wonder that many either get it wrong or fail to claim back input tax on allowable fuel costs altogether. The guidance on the Revenue website about this is spectacularly unhelpful so hopefully the advice on this Information Sheet will improve understanding of a fairly complex area.
Basically you have a choice of 2 methods for claiming input tax on fuel costs. The first method is to claim back the VAT on all fuel costs but also to pay output for private use according to the latest fuel scale charges as published by HM Revenue & Customs. The second method is to claim input tax only for business use as determined from your own mileage records.
The first method is only usually appropriate where you own a fleet of company cars and pay for all fuel costs irrespective of how much was actually for business mileage. As the taxable benefit on this can be as high as £5,915 per annum for each employee, it can be very expensive. Most employees with company cars are better off paying their own fuel bills and claiming mileage on any business use of the vehicle. However, if you are generous enough to pay for all your employees' fuel and they do enough private mileage to make this worthwhile for them, it would be a lot of extra work to keep a record of business mileage for each car just to calculate the right amount of input tax. In that case, it is probably worthwhile to pay output tax on the scale charges even though they tend to be a bit on the high side. For example, the scale charge on a car with CO2 emissions of 180 g/km is currently £302 per quarter. Assuming petrol costs £1.07 per litre and average consumption is 8 miles per litre, this implies private mileage of 9,032 miles per annum - probably more than most people drive.
The second method is to claim input tax on business mileage paid on expense claims. But how much VAT should you claim for each mile? Here the taxman is a bit more helpful and you can go by his advisory fuel rates. These are still based on engine size and for a petrol engine car between 1400cc and 2000cc you can claim 12p per mile. The VAT element on this at 15% is 1.565p per mile. This is based on an assumed cost of 97.5p per litre and an applied MPG of 36 (which is about 8.5 miles per litre) so it is probably a bit less than the true rate but is close enough for most purposes. You can use a different method to work it out if you like but if your input tax comes to a much higher figure you would need a very good reason to justify it. They may be called advisory but as far as the tax man is concerned they are the rates everyone should be using.
This means that your mileage expenses should be split between the fuel element and the balance. If you pay the maximum tax free rate of 40p per mile you would need to allocate 12p to fuel (for petrol engine cars between 1400-2000cc) and 28p for other running costs (with no input tax even though it covers things like maintenance). If you pay a flat 25p per mile for business mileage, you would still allocate 12p for fuel but the balance would be 13p. For diesel cars or those with a different cylinder capacity you would need a different split again. And if anyone drives more than 10,000 business miles in a tax year, you would need a further adjustment as the tax free rate drops to 25p per mile. You can see why lots of people just dont bother claiming back input tax on fuel.
However, the most important thing to remember is that your drivers must keep the receipts every time they fill up their cars. This was not necessary once, but a few years ago our friends in Brussels decided that the UK was in breach of EU law by allowing input tax to be claimed without receipts, even though the receipts bear no relation to the amount claimed in most cases. Therefore, you must now instruct your drivers to say Yes every time the attendant at the petrol station asks if they want a VAT receipt!