Today we were in conversation with a company about car mileage rates and VAT, a topic that comes up over and over again with our customers. So we thought we would share how to do this with everyone.
The simple answer is "Yes", but the solution can be a little complicated so let's start from the beginning:
An employee can use his or her own car for business purposes and is able to claim mileage at an agreed amount (currently 45p per mile for the first 10,000 miles and 25p per mile thereafter). If an employer pays more than this, then the additional amount will be taxed as income. If an employer pays less than this you get mileage relief from HMRC, this seems to be fair. Get reimbursed more than the rate, pay tax on the difference. Get reimbursed less, get tax relief on the difference.
We still awake? (*nudge*)
If you had been given a company car by your employer, and you had to reclaim mileage from your employer (so you paid for fuel yourself), then there are HMRC published advisory fuel rates for this. These are reviewed monthly and amended periodically.
Now, here's the cool VAT insight. HMRC say that of the 45 pence per mile (or the 25 pence per mile) is to cover many things, not just fuel. This covers the fixed (insurance, road tax) and the variable (wear and tear) running costs of your car. HMRC are saying that if you claim over 10,000 miles you have been reimbursed for the business proportion of the fixed costs of owning a car.
The portion of the 45/25 pence mileage rate that is for fuel is deemed to be those HMRC published advisory fuel rates on which you can claim back VAT. Woohoo!
So, if we had an employee who had a car with a 1400cc petrol engine, the fuel portion of the 45/25 mileage rate is 15 pence per mile (August 2013):
15 pence per mile represents 120% (100% plus 20% VAT - stay with us)
Therefore 20/120 multiplied by the 15p is 2.5 pence per mile. So for each mile that you pay that employee, you can claim back 2.5p in VAT.
There is one caveat, which in this day and age we don't really understand. We think it's a historical issue:
You will need to show HMRC on request VAT receipts that have enough VAT on them to cover the claim. (We have never been to a petrol station in the UK that is not VAT registered!)
So if 1000 miles is claimed in the VAT period, the total value on the receipts must be as follows:
The VAT reclaim will be 2.5p x 1000 = £25 and the fuel receipts should total £150
So this seems a little manual, how do I do this in Xero?
Here's the clever bit, when you submit your expense claim with Xero you can get Xero to do these complicated calculations for you. All you need to do is get the advisory fuel rate from HMRC and make sure that it is the correct rate (the rate for when the mileage was completed, not when claimed). You can then easily and simply submit the expense claim with Xero Touch or via the expense claim section:
But wait, there's more. Xero has calculated the VAT reclaim portion without the need for complicated calculations with the added bonus that now Xero files the VAT return from within. Claiming mileage as above will make sure that the VAT appears on the VAT return itself:
Xero saves the day again, making accounting easier and simple. If you'd like to know more about Xero, cloud accounting or just really like chatting about car milage rates then give us a call or get in touch for a chat.