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This article explains all the UK tax rules relating to fuel used for work, and the ways that buying it with fuel cards can make doing your taxes easier.
We will tell you all the records you need to keep in case HMRC wants to check your travel expenses are in order.
We include guidance on handling taxes when your employees use fuel cards to buy fuel for work and personal travel in the same vehicle.
If you’ve never claimed back VAT on business fuel at all, we’ve got that covered too.
This article is intended as general guidance for small businesses and sole traders, but it is not financial or taxation advice specific to your situation. You should always consult your company accountant if you have any questions about how taxation rules apply to you or your business.
Let’s begin by getting straight to the nitty gritty of the fuel card question.
The tax you must pay on fuel will be the same regardless of whether you buy it using a fuel card, cash or any other method. Where fuel cards make a difference is in simplifying the practicalities of calculating and paying tax.
Look out for the orange iCompario tips on this page, which highlight how a fuel card can help make your tax returns and reclaims easier.
The first thing you need to know is that you must save all your fuel receipts for three years after the end of the tax year they date from. If you make sure you never throw away a fuel receipt that is less than four years old, you will be fine.
This is not just advice, it’s the law.
HMRC can come after you for four years’ worth of receipts, to prove you can support your VAT reclaims. If they are long gone, you’re looking at an extra tax bill.
If this seems harsh, the good news is there’s a great upside. If you have kept your fuel receipts, you can still claim back VAT on the fuel you have used for business trips over the last three years.
iCompario tip: When your employees use fuel cards, everything they buy is listed in the card provider’s client portal. This means you don’t have to log your employees’ fuel receipts manually, you just have to store them in an organised way. Count the number of receipts each driver gives you and the number of transactions in your fuel card customer portal, to make sure they tally. When it comes to claiming back VAT in April, you can download a consolidated invoice with everything HMRC needs to know.
The amount of VAT your business should pay or claim back from HM Revenue and Customs (HMRC) is usually the difference between the VAT you charged your customers all through the fiscal year, and the VAT you paid on your business purchases in the same period.
VAT you charged customers – VAT you paid = VAT you owe HMRC
If the VAT you paid is more than the VAT you charged customers, then the answer to this maths question will be a negative number. This means HMRC owes you a VAT refund.
The farmer’s favourite , the Flat Rate Scheme for VAT offers major savings for lots of other businesses too. Currently, the highest level of VAT savings under the scheme are offered to pub landlords.
If you register your business for the Flat Rate Scheme, whatever the answer to the calculation above may be, you keep the money. This represents a good deal if your answer to the VAT formula above is a positive number.
If it is a negative number – which it would be if you invested lots in your business and then did not sell enough – then you would lose out. You can’t reclaim the VAT on your business purchases unless they are certain business assets worth over £2,000.
Under the Flat Rate Scheme you pay a fixed rate of VAT to HMRC.
The standard rate of VAT is of course 20%, but if you register for the Flat Rate Scheme and you are a farmer, you will only pay 6.5% instead. Builders currently pay 9.5%, and pubs only pay 1%. This page has a table showing the flat VAT rate by type of business.
To join the scheme your VAT turnover must be £150,000 or less (excluding the actual VAT on this).
Do any of your employees put fuel into your vans, company cars or HGVs and then sometimes use the vehicles for personal travel?
Lots of companies let their employees do this. Sometimes, for practical reasons it’s impossible to avoid. The fly in the ointment, though, is that taxation works differently for work travel and non-work travel.
Your employees should keep records of their mileage for personal use and then pay your company back for this fuel. Your company will need to store these mileage logs for four years, to show HMRC that you maintain records and that your VAT reclaims are justified.
You’ll need a record of when and why the employee travelled, and keep receipts as evidence. The four-year rule applies to saving all of this information.
Here is an example of a mileage log from Business Accounting Basics, a website which offers lots of free information and resources for micro businesses.
iCompario tip: Vehicle tracking apps or websites, also known as telematics, will create a trip log like this for you automatically. You can download the data as a CSV file. All your employees will have to do is add in the reason for the journey. This saves your employees time. It also makes mistakes and dishonesty impossible. Look at our section on vehicle trackers if you want to know more. Several of the entry-level systems have an all-in cost of less than a pound a day.
Sometimes the difference between a work journey and a non-work journey is not as clear as you might think.
Let’s look at an imaginary company called Everything Ltd.
Sally works for Everything Ltd. as a sales rep, and she buys petrol with a company fuel card. She has to log her exact mileage for every journey on a spreadsheet.
Sally records her commute to and from the office, which is her regular place of work. This is not considered business use. Normal commuting counts as personal travel. For these journeys, Sally checks YES in the mileage to pay back column.
Sally makes journeys to and from client sites, and these are considered ‘temporary workplaces’. She includes journeys to and from her hotel, while she is staying in London. For these journeys, Sally checks YES in the column mileage Everything Ltd. pays for.
Jack works for Everything Ltd. as a plumber.
He drives to each client site in a van which belongs to Everything Ltd. He doesn’t keep a log of his mileage, because he leaves the van in the depot at the end of his shift and goes home in his own car. This means all the fuel he puts into the van is for work use only.
Yes, you can. If your employees use fuel cards to fill up cars that are for mixed use, you can let them keep the fuel as a perk. What a generous boss you are! There’s a catch, though.
If you do, this is a taxable employee benefit. A taxable benefit is anything with a cash value, that you give to an employee on top of their salary. It is always taxed.
The tax charged on fuel when it’s given as an employee benefit is called the Fuel Benefit Charge.
At the end of the tax year, you’ll need to do two things.
You have to report what you pay on form P11D which is your end-of-year expenses and benefits report for employees and directors. You must report to HMRC the full extent of personal use across all your vehicles and employees. This includes any fuel for personal use, and any company vehicles also used for private journeys.
You also have to pay Class 1A National Insurance contributions (that is, employer contributions) on the value of the fuel, which are currently 13.8% of the value of the benefit.
This is such a drag that most small companies decide not to be so generous with their employees. If you are so lovely that you still want to do this for your employees, you can find out more by reading HMRC’s guidance on car and car fuel benefit for full details of the rules and when they apply.
If you have decided to be a slightly less generous boss, you can still let your employees use the company fuel card to fill up the vehicle they use for both work and personal travel. You just have to make them pay you back.
How much, exactly? You have two choices.
The advisory fuel rates are tables of fuel prices that the government makes available to companies that don’t have their own detailed records of what was actually spent.
In other words, they are for companies that don’t use fuel cards.
You still have to make your employees log how long each journey was and the reason for it (work or personal), but the advisory rates save you or them trying to work out how much they spent on the fuel in their tank when they made the journey, which is frankly impossible.
The advisory fuel rates consist of tables of prices per mile for diesel, petrol and liquid petroleum gas (LPG). The average miles per gallon that these are based on is taken from vehicle manufacturers’ information.
They are updated frequently, so never download and save them – always refer back to the HMRC website to make sure you are looking at the current correct figures.
If you use fuel cards, your employees will much prefer option two.
When your employees repay you for non-work fuel that they buy with their company fuel card, you do not have to use the advisory rates at all. You can charge actual prices.
The details that HMRC requires are private mileage, and how much the fuel for that mileage cost. Make absolutely sure you keep all the details for four years after making the claim.
iCompario tip: As a fuel card user, you will not need to rely on these as your card provider’s software will give you the details. Many fuel cards provide a fixed diesel, petrol, unleaded or other fuel price for a week. This makes it easy for you to work out the price for all mon-work mileage done that week, driver by driver.
Again, you have two choices.
Your first option is to use the actual amount of VAT that was charged on all the non-work fuel your employee bought with their company fuel card.
iCompario tip: You will find this VAT data in your fuel card account management portal, no matter which card provider you use. Few card providers have full data going back four years. The legal responsibility to save this data is yours, not theirs. Print out the data at the end of the tax year, or store it electronically, and save it with your tax return so you have no difficulty accessing the complete data even after 4 years. If you throw the records away and then get inspected by HMRC, you could find yourself in a pretty unpleasant position.
2 – VAT fuel scale charge
Alternatively, you can use the VAT fuel scale charge that HMRC provides. This is your only option if you don’t keep a detailed log or don’t have fuel cards.
You can reclaim 100% of the VAT from business fuel if you also pay a VAT fuel scale charge. It’s a simplified way of taxing private use fuel.
You find out how much to pay by using the HMRC VAT fuel scale charge online calculator. To use this, you need to enter the relevant car or van’s CO2 emissions, which you will usually find in the vehicle’s log book.
If you run a vintage car chauffeur service, or for some other reason have business vehicles made earlier than 1997, you will enter a figure based on the engine size instead of the CO2 emissions.
Please note that this scale changes four times a year. The change dates are the first of March, June, September and December.
For this reason, do not store the rates. Always look them up online and make sure you are using the right scale for the time period you are referring to.
This VAT reclaim method is one of the easiest for HMRC to check, and catch companies on. You may be shocked how many companies forget to pay the fuel scale charge. Even when they do, they often don’t update the amounts when the fuel scale charge changes.
There’s no legal reason why you cannot work out whether using the actual VAT on fuel paid at the pump, or the fuel scale charge, results in the lower amount of tax to pay. This is most likely to result in a consistent advantage of one method over another.
Either way, and especially if there’s little difference, we strongly suggest choosing one method and sticking to it. There’s little point attracting suspicious attention from HMRC, which could lead to the time demands and stress of an inspection.
Yes, this is an option.
If you choose to claim no VAT, then you need to apply this across all the vehicles in your business, both company cars for personal use and also commercial vehicles.
The only reason we can think of why a company would choose this is if they just find it all too confusing and do not know how to reclaim VAT. There’s no actual benefit.
iCompario tip: If this is what you have been doing, we think it’s seriously time to get a fuel card!
You can reclaim VAT paid on other things you have bought for your company vans or cars.
This includes AdBlue and oil, and running and maintenance costs, such as repairs or off-street parking. It also includes any accessories you’ve fitted for business use, which includes your telematics system. You can do this even if you cannot reclaim VAT on the vehicle itself.
iCompario tip: If your drivers pay for AdBlue, oil, road tolls and bridge tolls with the company fuel card, the dates and amounts will be logged in your fuel card provider’s management software.
You do have to pay employers’ National Insurance (which is class 1A) on some motoring costs if they’re considered employee benefits.
This includes parking permits, and also tolls and congestion charges which were paid during non-work journeys.
You don’t pay any national insurance on servicing and insurance costs.
This is a whole new can of worms.
The short answer is yes, but the rules on reclaiming VAT from European countries are complicated. The process is different for each country and you have to apply to each country individually.
iCompario tip: Some fuel card companies provide fuel cards that can be used to buy diesel or petrol right across Europe and also used to pay for road tolls and certain other expenses related to work travel. These card providers often offer a European VAT reclaim service for a fee. We recommend using this service unless you have your own accountant who can do the job for you for less money. So long as the tax you get back is more than they charge you for the service, it’s worth it.
If you use a different agency from the card provider, make sure they are compliant and qualified to provide this service.
The process of reclaiming VAT seems complicated at first, but most companies find it’s actually easier than they feared after bracing themselves to so it first time.
“I was woken up by a phone call telling me I’ve committed tax fraud. They must have had the wrong number, cause I don’t pay taxes.”
If you can afford a company bookkeeper to take care of this along with everything else, they are worth the money.
If not, remember HMRC is keen for you to get it right. If you ask them for advice or help, they are usually very willing to guide you through how the rules apply to you. Just make sure you have read the rules online so you are not asking them questions about something you could have looked up for yourself.
This article was written by guest author Veronica Hughes, who works for Radius Payment Solutions Ltd.
Veronica Hughes has been a director at Schroders, Citi, Coutts Bank, Cazenove and PriceWaterhouseCoopers. She has 26 years’ experience as a financial analyst and researcher specialising in heavy industry and petroleum-related manufacturing sectors. After passing Chartered Financial Analyst exams in 1995, she specialised in equity research and mergers and acquisitions in London, New York and Zurich.