An End to VAT Reclaims on Employee Mileage?

Customs are expected to issue revised guidance on procedures for reclaiming (input) VAT on employees’ mileage expenses. This follows an ECJ ruling (European Commission vs United Kingdom) that businesses should not reclaim the VAT element of reimbursed employee mileage allowances because EU law says that businesses must have a valid VAT invoice to support the claim for input VAT recovery.

The system used by many UK businesses where employers pay employees for their business mileage using a mileage rate will have to change, although the detail and timescale has not yet been announced. Typically a business paying an employee 40p a mile for 100 miles, being £40, would recover input VAT of £1.79. This is the VAT element of the fuel costs of say 12p per mile.

Suggestions are that businesses may have to stop claiming back VAT on mileage payments altogether, or may have to introduce a system where the business itself pays for the fuel and employees repay the business for the private miles they travel. Fuel cards or business credit cards could be used but this would create additional administration for the business and potential benefit in kind issues for the employee.

Businesses that purchase fuel using fuel cards or company credit cards (where the business meets the cost of all fuel provided to an employee) and where the VAT fuel scale charges of between £35 and £68 per quarter apply to cover the private use, will not be affected by any changes.