VAT and mileage

[Fireman1987]

Hi,

My first post, so please be gentle

I use Xero to maintain my accounts and, until I went over the 10,000 mile limit, used to pay myself 45p per mile.

I split this into two parts to make things easier, specifically 33p as the non-VAT part and 12p as the VAT part, which my accountant agreed with.

Now I've gone over the 10,000 mile threshold, I will claim 25p, but I can't seem to find anyone who can tell me how I should now split that amount into a corresponding non-VAT and VAT part. Could someone help, please?

As an aside, I appreciate I can actually pay myself whatever I want for mileage, but pay income tax on anything over 45p, but is there any loss/gain in continuing to pay myself 45p/mile and just pay the income tax on it?

Thanks.

[Trevor S]

The 10,000 miles has no impact for VAT purposes. So if 12p per mile is being accepted when you're paying 45p per mile, it will be accepted when you're paying 25p per mile.

The logic is that the cost of fuel is roughly proportional to the use you make of the car. Some other costs (insurance, tax, MOT) are more fixed, so the cost per mile reduces as the number of miles increases. In reality the cost doesn't suddenly drop at 10,000 miles. But the alternatives would have been either more smaller drops, or some form of sliding scale, both of which would have been far more complex to apply.

As you say, you can pay as much as you like, but anything over the 45p/25p limit would be taxed in the same way as if you'd been paid it as salary.

Regardless of the number of miles claimed, you should be able to justify your fuel rate. For this reason, many use HMRC's advisory fuel rates - which are actually intended for employees reimbursing employers for use of company cars, but are accepted for VAT purposes too. Some will use other published rates, such as those produced by motoring organisations. The advantage of using a published rate is that it will regularly take account of changing fuel prices, without you needing to justify a more significant increase at some point in the future. But if you go with published rates, find one source and stick with it. Don't be tempted to switch between sources based on which has the highest rate at the time!

[Fireman1987]

Thanks, Trevor S - and you were gentle

So, if I understand correctly, these lines in Xero will be 13p non-VAT and 12p VAT? I guess this means I'll still get same benefit?

Thanks again,

Pete

[Trevor S]

That's right.

The benefit to your business is the amount of VAT claimed, which remains at 2p per mile (1/6 of 12p). The reason why it's 1/6 rather than 20% is because 12p is the VAT inclusive amount.

[Fireman1987]

Thank you.

Just out of curiosity, my 'over claim' for mileage amounts to £460, and I'm not going to be doing the miles in the last two months of the financial year to cover that amount.

I see three options available to me, for the remainder of this financial year:

1. Do what may accountant suggests, and adjust future mileage payments to 25p/mile and pay the over payment off through those claims (I probably won't get the mileage in to cover that, though).
2. Pay back the overpayment directly from my own funds.
3. Pay myself 45p for the whole year and pay the income tax on the difference, including the over payment, but do it properly next year.

I'm thinking Option 2 is probably the best option

Thanks again