Claiming Fuel Expenses in Your UK Business: A Comprehensive Guide

Navigating claiming fuel expenses for business purposes can be a winding journey, especially for small business owners. At the heart of this decision is the distinction between using a personal vehicle for work purposes and managing expenses for a company car. Let's explore the tax implications and strategies surrounding these choices.

Using Personal Vehicles for Work Purposes

Many small business owners prefer to use their personal vehicles for work-related travel. When doing this, you have to claim mileage instead of fuel costs. That means you do not pay for the fuel with your business bank card, instead you pay for it personally and you are the reimbursed business mileage based on the miles you do for business purposes. 

In the UK, HMRC sets Approved Mileage Allowance Payments (AMAP) rates, which currently (2023) stands at 45p for the first 10,000 miles and 25p thereafter. When business owners use this, they are reimbursed (i.e. you can make a payment from your business to yourself for the total) tax-free up to this rate.

Remember, claiming mileage covers all vehicle expenses, including insurance, tax, fuel, servicing, and maintenance. That therefore means that for a vehicle in your own name (i.e. a personal vehicle) you also cannot claim car maintenance, tyres, insurance, road tax etc. 

It's crucial to keep a detailed log of all business journeys to validate these claims.  This can be done in a simple spreadsheet with the date, mileage and reason for travel noted. There are also a few mileage apps that you can use and track using your phone. 

The Scenario with Company Cars

Company cars present a different scenario.  

This is where you are driving a vehicle which is registered in the company name (and not your own).

Here, business owners have the opportunity to reclaim the VAT on fuel, but you must account for the personal use of the vehicle, which is deemed a 'benefit in kind'. Subsequently, both the employer and employee face tax implications.

A pivotal decision surrounds how fuel is paid for.

If the company pays for all fuel (business and personal), the tax efficiency can quickly erode due to the 'Fuel Benefit Charge'. This is where the advantage of having a fuel card comes into play, as it can provide a clear and concise record of fuel expenses. Yet, business owners need to be meticulous in distinguishing personal use and reimbursing the company accordingly to prevent unwanted tax bills.  This means keeping records of every single journey made, and many business owners don't want to do this increased admin. 

For those not eager to dive deep into the intricacies of logging every journey, an alternative exists.

They can choose to pay for all their fuel personally and then claim back the business mileage at the Advisory Fuel Rate (AFR) set by HMRC. This rate is purely for fuel and doesn’t include other vehicle costs. Using AFRs to claim can streamline the VAT recovery process and remove the risk of the Fuel Benefit Charge.

Reclaiming VAT on Fuel

The process of reclaiming VAT on fuel can appear daunting, but it's achievable with structured record-keeping. Maintaining comprehensive records is the cornerstone of accurate VAT recovery. Remember, you can only reclaim the VAT on the business portion of your fuel use.

For company car drivers who opt for the mileage claim method using AFRs, it’s worth noting that they can reclaim VAT on the fuel element of the mileage claim. They would use the AFR to calculate the amount of fuel used and then apply the appropriate VAT fraction.

Conclusion

Fuel expenses, though seemingly straightforward at first glance, require a nuanced approach for optimal tax efficiency within a UK limited company. The choice between claiming mileage or diving into VAT recovery on fuel costs hinges on several factors including the nature of the car (personal or company-owned) and the owner's preference for record-keeping.

By understanding the benefits and challenges of each approach, UK small business owners can make informed decisions that bolster their bottom line while staying compliant with tax legislation.

Note: Tax legislation is dynamic, and HMRC guidelines can evolve. It's essential to consult the latest HMRC documentation or seek expert advice to ensure compliance.

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