We pay our employees a mileage allowance for business journeys in line with the Taxman’s recommended rates. Can we reclaim any VAT in respect of those payments?
You can reclaim the VAT but only on the proportion of the mileage allowance that relates to fuel. The mileage rate of 40p per mile has a large element of reimbursement for the vehicle’s other running costs. You need to use as a reference point the HMRC advisory fuel only rates which vary according to the size of the car and are reissued several times a year. For example, if the vehicle has a 1500cc petrol engine and you reimburse the driver for 1000 miles, the value of the fuel used is 13p per mile: £130. The VAT element is 7/47 x £130 = £19.36. However, the employee must supply you with fuel receipts totaling at least £130 to allow you to reclaim the VAT shown on those receipts.