VAT - 19.05.2022

VAT on staff travel

Passing on travel costs

One error often made by businesses that provide professional services involves passing on their employees’ travel expenses to their customers. The following example illustrates the problem.

Example. Acom Ltd operates an advertising business and has clients all around the UK. Its standard terms state that its fees are based on time spent by its staff, plus expenses they incur if required to travel to meet the client. When Acom sends a bill it itemises any rechargeable travel costs and sends receipts for these. It believes by doing so it can treat the expense as a VAT “disbursement”. HMRC’s practice is that disbursements are not part of the supply of services and therefore not subject to VAT. For example, if Acom’s bill included £150 (zero-rated) for rail fares it can simply include this as an item on the bill without adding VAT.

Trap. Acom is wrong. Several conditions must be met for an expense to be treated as a disbursement . At least one of these is not met in the circumstances described in our example. Therefore Acom should add VAT to the £150 travel cost recharged.

For detailed commentary on VAT disbursements, visit https://www.tips-and-advice.co.uk , Download Zone, year 22, issue 16.

Assuming travel costs include VAT

Public transport costs are VAT zero-rated. Despite this HMRC often finds businesses assuming that such fares include standard-rate VAT, which they then incorrectly reclaim. Similarly, while taxi fares may include VAT they frequently don’t as cab drivers are aften sole traders whose turnover doesn’t require them to be VAT registered.

Tip. Ask your employees to obtain receipts for all taxi fares. Only if the receipt shows a VAT number should you reclaim VAT. If the amount of VAT isn’t shown, the amount reclaimable can be calculated as one-sixth of the total (excluding the tip).

Mileage allowances

Some mistakes can result in you paying too much VAT rather than too little. For example, if you pay your employees’ mileage allowances for business journeys they make in their own or company vehicles, you can reclaim the VAT that relates to road fuel costs. This is often overlooked. The amount you can reclaim is the lower of the business use proportion and the VAT shown on receipts your employees provide to you. Tip. If you use self-employed contractors to carry out work on your firm’s behalf, you can treat mileage allowances you pay them in the same way as you do for employees.

Example. Acom has ten employees and contractors who it pays 45p per mile for business journeys made in their own vehicles. It estimates the cost of fuel per mile on average is 15p. The VAT element is 2.5p (15p/6). In its VAT quarter ended 30 June 2022 Acom pays a total of £5,400 in mileage allowances of which £1,800 is the fuel element and the VAT, £300. This is the maximum Acom can reclaim. However, it receives fuel receipts from its employees for that quarter on which the VAT total is £270. It can only reclaim the lower amount. Tip. You can, as Acom did, work out the fuel cost per mile for each vehicle for each employee. Alternatively, HMRC will not object to you using the advisory fuel rates it publishes each quarter for direct tax purposes. This makes calculating the VAT you can reclaim much easier.