New rules on VAT recovery on fuel purchased by employers are not as disastrous as expected. Rebecca Benneyworth examines the background to the announcement and looks at the practicalities of the new regime.

In March 2005 the European Court issued its judgement in the infraction proceedings taken against the UK regarding recovery of road fuel purchased by employees.

The European Commission took issue with the practice in the UK of allowing employers to recover VAT on road fuel purchased by employees, for which they were reimbursed, either in full or by means of a mileage allowance. The Commission’s case was that the Value Added Tax (Input Tax) (Person Supplied) Order 1991, which permitted recovery in these circumstances is incompatible with the Sixth Directive on two grounds. These are :

* The fuel is supplied to the employees as private individuals, so the employer has no right to recover input tax as the fuel has not been supplied to them. (Article 17(2)(a))
* Even if a right to deduct could be inferred under article 17(2)(a), the employer did not hold a VAT invoice and thus was not permitted to deduct input tax. (Article 18(1)(a)).

The UK’s case in defence of the 1991 Order was that employees were purchasing fuel on behalf of their employers, for the purpose of the business, and as such had created the necessary chain of supply for input tax recovery. The reimbursement mechanism recognised the flow of cash, but allowed the practical application of the recovery rule, and preserved the neutrality of the tax. Without it employers would be forced to bear input tax which should otherwise have been recoverable by them, and the imposition of VAT would be distorted.

The European Court found in favour of the European Commission and held that the 1991 Order was not compatible with the Sixth Directive in the aspects stated by the Commission. In particular, the Order did not ensure that recovery was limited to fuel purchased solely for the purposes of the taxable person’s taxable transactions, and the taxable person was not required to hold a VAT receipt.

HMRC has studied the judgement and has now issued the relevant Order to replace the 1991 Order. It was expected that the right to recover input tax would be limited once the judgement was applied in the UK, but HMRC seems to have found a way through the judgement to leave employers largely in the same position as they are now.

The new legislation will be known as the Value Added Tax (Input Tax)(Road Fuel Purchased By Employees) Order 2005. The Order makes it specific that the fuel purchased by employees on behalf of their employer is VAT recoverable, provided it is used in the business in making taxable supplies and is supported by a VAT receipt. This leaves the financial position for employers unchanged, but adds the administrative requirement that a VAT receipt is held for the fuel. This can be a full tax invoice of a less detailed tax invoice.

Practical implications
The methods of fuel reimbursement and the application of the new Order to them are as follows :

• Fuel is charged to an employer’s account at the filling station – no change. Employer is purchasing the fuel direct and will hold a VAT receipt in his own name. The application of the fuel scale charge in respect of private fuel use by the employee should be observed.




• Fuel is purchased by fuel card or credit or debit card in the name of the employer – similarly no change, as the fuel is being purchased by the employee on behalf of the employer and the employer receives a bill to that effect. These purchases should, however, always be supported by VAT receipts and the fuel scale charge rules applied.




• Fuel is purchased by the employee either by cash or personal credit or debit card and the full cost of the fuel is reimbursed by the employer. In this case VAT receipts must support the employee expense claim in full, and the fuel scale rules observed.




• Fuel is purchased by the employee in cash or personal credit or debit card and the employer reimburses the employee for business miles travelled – either at a fuel only rate in a company car, or as part of a full mileage allowance for use of his own car. In this case the employer should ensure that only business miles are claimed for (this would normally be controlled by the payroll reporting issues in any event) and that he holds a VAT receipt for the fuel.

What is a valid VAT receipt when mileage rates are paid?
It is not absolutely clear from the HMRC announcement to what extent the VAT receipts should match the mileage expense claims. Given that the reimbursement of fuel will be less than the full value of the fuel purchased by employees, the following might be how the new rules will work in practice :

Employee purchases fuel as follows in the month of March 2006 :

4 March £38.25
13 March £29.90
17 March £20.00
23 March £34.12
30 March £33.87

He travels 978 miles on business journeys that month – substantiated by a full mileage log, and is to be reimbursed at a rate of 40p per mile for them. This is deemed to include a fuel only element of 12p per mile for a 1600cc car (HMRC recommended fuel only rates).

The amount of fuel reimbursed is therefore £117.36, and fuel receipts totalling at least this amount should be submitted to support his mileage claim. The receipts total £138.14, so even if the receipt for £20.00 is mislaid, there are still sufficient VAT receipts to satisfy the requirements. Provided the employee asks for and retains VAT receipts for his fuel, these will comprise less detailed tax invoices, which should be provided to the employer to support the mileage claim.

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