Martyne Pearson, Senior VAT Manager

Many businesses reimburse employees for VAT incurred on the purchase of road fuel. To date, HMRC have operated a system of Road Fuel Scale Charges (‘RFSC’) to help businesses account for VAT when business road fuel is put to private use.

The RFSC enables the business to claim all of the VAT on both private and business use. In order to compensate for claiming VAT on the private use of the road fuel  a RFSC per car is charged.

As an alternative to the above, HMRC also allow businesses to claim VAT on business mileage by reference to the business use of the vehicle, supported by detailed mileage records. This is to ensure that no mileage relating to private use is claimed.

If a business does not want to pay a RFSC, or keep detailed mileage records (in order to adjust for the private use of the fuel) the only other option is to make no claim for the VAT Incurred on fuel costs.

The RFSC has long been regarded by many businesses as unfair and it has now been found not to comply with the provisions of the EU Directive, and therefore must be changed.

The proposed changes apply to cars only, as RFSCs do not apply to commercial vehicles.  They aim to acknowledge that the RFSC cannot be applied as a compulsory charge where detailed mileage records are not retained.  Instead businesses will be able to recover VAT on fuel costs incurred for both business and private mileage, and pay VAT back to HMRC by reference to any private use charge made to employees.  It is anticipated that the charges will need to reflect the market value of the fuel, so that businesses do not seek to gain an advantage by making a below value charge.

This policy change creates the potential for business to make claims, as follows: 

1.  Where a business has recovered the VAT incurred on fuel relating to both business and private mileage, with a charge made to employees for the private use element and RFSCs have been applied, a business can now make a claim for the difference between the private use charge and the RFSC.

 2.  Where VAT has not been claimed on fuel costs, but a business has accounted for VAT on a private use charge, the VAT on all fuel costs (both private and business) can be claimed.

3.  Where VAT has not been recovered on any fuel costs incurred by a business, the VAT on fuel can now be claimed, subject to a private use charge being applied and supported by mileage records.

In practice this should better reflect the use of the fuel by the businesses, and bring the charges into line with those applied to commercial vehicles.

The proposals also seek to withdraw a concession for partly exempt businesses which apply the RFSC on a proportionate basis in line with their partial exemption method, and affected business may need to consider a revision of their partial exemption method.

A consultation document has been issued, with responses due by 20 July 2012, reflecting the normal 12 week period for consultation.

For further information or advice on how to make a claim please contact The VAT Consultancy on 01962 735350 or vat@thevatconsultancy.com