Advisory fuel rates and VAT updated 1 December 2010

Advisory fuel rates and VAT updated 1 December 2010
Thursday, 02 December 2010 12:18

HMRC announced new advisory fuel rates (AFRs) on 29 November and they expect employers to use these revised rates to reimburse the cost of fuel used in company cars for journeys taken from 1 December 2010. The AFRs can also be used to calculate the amount an employee should reimburse his employer in respect of road fuel paid for by the employer, which is used for private journeys.

The new AFRs, with the old mileage rates in brackets are:

Engine size               Petrol           Diesel        LPG
1400cc or less         13p (12p)    12p(11p)    9p (8p)
1401cc to 2000cc    15p (15p)    12p(11p)    10p (10p)
Over 2000cc              21p (21p)    15p(16p)    15p (14p)

Remember these rates are supposed to be used only to reimburse the cost of business related journeys. If the employer reimburses the cost of all fuel in a company car this will inevitably include the cost of fuel for private journeys, which creates a taxable benefit and potential VAT problems.

Where the business reclaims the cost of VAT on fuel used for business or private journeys it must hold VAT receipts for the fuel used. Say the employee claims the AFR for 500 miles travelled in a 1550 cc petrol company car for the quarter to 31 December. The amount paid by the employer will be £75 (15p x 500).  The VAT element of this cost will be 7/47 x £75 = £11.17, but the fraction used to calculate this element will change to 1/6 for fuel purchased on and after 4 January 2011. The employee must supply the employer with VAT receipts totalling at least £75 for the quarter to allow the employer to reclaim the VAT of £11.17. 

If the fuel reimbursed covers any private journeys the employer must apply the VAT fuel scale charge based on the C02 emissions of the car, to effectively charge the business itself the output VAT on the private fuel. This scale charge from the tables (see below) is included in box 1 on the VAT return, while the VAT reclaimed of £11.17 goes in box 4 of the same return. As the VAT scale charge doe not vary with the number of miles driven, the VAT scale charge in the box 1 could exceed the box 4 reclaimed amount. To avoid this difficulty the business must either ensure it does not reimburse the cost of any private fuel, or does not reclaim VAT on any fuel supplied for company vehicles. 

Remember the VAT scale charges will change when the standard rate of VAT increases to 20% on 4 January 2011.

Advisory fuel rates from 1 December 2010

Fuel scale charges for periods beginning on or after 1 May 2010

Fuel scale charges for periods beginning on or after 4 January 2011 (annex C)

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