Most people don’t process a VAT claim on the mileage cost to the business, or if they do, they are processing it incorrectly. Here is how to correctly process your mileage claim on your VAT return.

Background

Claiming for your mileage is an all inclusive allowance covering all the costs of running and maintaining your car, therefore you cannot put through separate costs relating to things like MOT, repairs or road tax etc.

You must keep records of all mileage you do, whether in a notebook, spreadsheet or app; you need to have it recorded and kept, along with all your other records, for a minimum of 5 years after the end of the deadline of the tax year they are relevant to.

As a VAT registered business, you can claim a portion of their mileage allowance on your VAT return, here’s how to do it:

Calculating the VAT Element of the Mileage

It’s a bit tricky to calculate as it is based on only a portion of your mileage allowance and it also depends on the type of car you drive.

We first need to open up the HMRC Advisory Fuel rates ⇒ https://www.gov.uk/guidance/advisory-fuel-rates

Note – this is updated every quarter, so make sure you keep your records up to date with how much you are claiming for VAT.

You can see that you need to select the appropriate bracket for your engine size and fuel type.

Note – hybrid vehicles come under the fuel type that they run, and we are not able to claim back VAT on EVs (electric vehicles) as HMRC do not consider electricity as a fuel.

If we use a 1400cc petrol vehicle as an example, out of the 45p mileage allowance we can pay ourselves 10.4p* of that is deemed to be fuel (the rest of it relates to wear & tear of the vehicle).

*as at 1 March 2021

You can claim VAT on that 10.4p. So 20/120 * 10.4p = 1.73p. This means for every mile you drive and claim as a business expense, you can also claim back 1.73p in VAT.

Another example:

Your mileage in your 1400cc petrol vehicle was 150 miles.

The fuel rate is 10.4p.

150 miles x 10.4p x 20/120 = 260p = £2.60. You can claim £2.60 on the client’s VAT return.

Where you get a part of a penny as an answer, please round down to the nearest whole penny.

Where the number of mileage exceed 10,000 in one year, the fuel rate stays the same, although where the balance was to 45p per mile, your balancing figure will now be to 25p per mile.

NOTE: (I wrote that in capitals because it’s important!) Please make sure you retain VAT receipts for fuel purchases to the value of the amount you are claiming as backup for your VAT claim. This is an historic rule, as all UK fuel stations will be VAT registered. Fuel receipts from anywhere outside of the UK (including the Channel Islands) will not be accepted, as no VAT would have been paid on those transactions.

Bookkeeping in Xero

When we put this into Xero, we can put the two elements on different lines of the bill:

Your mileage in your 1400cc petrol vehicle was 150 miles.

As worked out above, we can claim £2.60 on the client’s VAT return.

The numbers we need are as follows:

(45p-10.4p) x 150 miles = 5190p = £51.90 which will be charged at No VAT

10.4p x 150 miles = 1560p = £15.60 which will be charged at 20% VAT

With Xero, you’ll need to make sure it says “Tax Inclusive” in the top right, otherwise it will give you incorrect figure for VAT.

The line items on the bill in Xero will be as follows:

Double check the VAT amount is the same as you calculated and the total is the same as the 45p x 100miles, then you can post it.

If you’re using Xero, please post a VAT receipt with this bill (so that there is enough VAT paid on the invoice to cover the VAT you’re claiming) so that it is very easy for you to provide records if there is a VAT enquiry with HRMC.

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