When a VAT registered employer pays a mileage allowance to staff who drive their own cars on business, it can reclaim VAT on the fuel part of the allowance only: the business miles multiplied by a fuel cost per mile, then by the VAT fraction of one sixth. HMRC accepts its advisory fuel rates or AA and RAC figures for the fuel cost, but the claim must be backed by mileage records and by fuel receipts at least equal to the business fuel, dated no later than the end of the VAT period.

Why can an employer reclaim VAT on fuel its employee bought?

Input tax is normally VAT on supplies made to the business. Fuel bought at a garage by an employee is sold to the employee, so a special rule is needed. VAT Notice 700/64 (Motoring expenses) points to the Value Added Tax (Input Tax) (Reimbursement by Employers of Employees’ Business Use of Road Fuel) Regulations 2005, SI 2005/3290. These treat road fuel delivered to and paid for by an employee, for use in the employer’s business, as supplied to the employer where the employee is reimbursed either at actual cost or through a mileage allowance (paragraph 9.10).

VIT55400 refers to VIT43200 for who counts as an employee. That includes current staff, directors and anyone managing the business, including partners, and temporary or casual staff. It does not include former employees, a shareholder who is not also an employee, or a relative of an employee. Self employed people appear on that list only for subsistence expenses, so this route does not cover mileage paid to contractors. For the wider picture on staff expenses, see reclaiming VAT on employee expenses.

Why is only part of the allowance eligible?

A mileage allowance pays for the whole cost of running the car: fuel, insurance, servicing, depreciation and so on. Only the fuel is a supply on which VAT was charged and which the regulations treat as made to the employer. The income tax rate tells you nothing about the VAT. For 2026 to 2027 the approved mileage allowance payments rate for cars and vans is 55p a mile for the first 10,000 business miles and 25p after that, but the VAT claim is worked out on the fuel element alone, however much is paid per mile.

Paragraph 9.8 of Notice 700/64 says input tax is the fuel element multiplied by the VAT fraction, and that the allowance must be based on mileage actually done. With VAT at 20%, the fraction is one sixth.

Which fuel rate should you use?

Notice 700/64 paragraph 9.10 and VIT55400 say HMRC accepts its own advisory fuel rates and current rates published by motoring organisations such as the AA and RAC. The advisory fuel rate page itself says the rates are for company cars for income tax purposes, but for VAT HMRC uses them simply as an accepted measure of fuel cost per mile, including for employees’ own cars.

The rates from 1 September 2026 are:

Fuel and engine size Rate per mile
Petrol, 1,400cc or less 14p
Petrol, 1,401cc to 2,000cc 17p
Petrol, over 2,000cc 27p
Diesel, 1,600cc or less 15p
Diesel, 1,601cc to 2,000cc 16p
Diesel, over 2,000cc 22p
LPG, 1,400cc or less / 1,401cc to 2,000cc / over 2,000cc 11p / 13p / 20p

HMRC reviews the rates on 1 March, 1 June, 1 September and 1 December, and says the previous rates may be used for up to one month after new rates apply. Where an employer caps the allowance, for example paying the 1,401cc to 2,000cc rate for all cars over 2,000cc, VIT55400 says input tax is allowed only on the rate actually paid.

What does the calculation look like?

Illustration only. An employee drives 1,200 business miles in October to December 2026 in her own 1.8 litre petrol car, and the employer pays 55p a mile, £660 in total.

  • Fuel element: 1,200 miles × 17p = £204.00
  • Input tax: £204.00 × 1/6 = £34.00
  • Receipts needed: fuel invoices totalling at least £204.00, dated on or before 31 December 2026

The remaining £456 of the allowance carries no VAT. If the same employee drove a 2.5 litre petrol car and the employer’s policy paid fuel at the 17p band rather than 27p, the claim would still be £34.00.

What fuel receipts must the employer hold?

Since 1 January 2006, paragraph 9.10 requires the employer to keep the VAT invoices issued to employees when they bought the fuel. A full VAT invoice or a less detailed invoice will do. The invoices need only cover the cost of the business fuel, not the whole allowance, and HMRC accepts that they will rarely match a period’s claim exactly and may straddle periods. The firm rule is that a claim cannot be supported by an invoice dated after the period it covers, so HMRC suggests employees keep all their fuel receipts. Invoices are not needed where the employee buys fuel with a fuel card, credit card or debit card provided by the employer.

What mileage records are needed?

Paragraph 9.9 requires a record for each employee paid a mileage allowance showing the mileage travelled, whether journeys are business, private or both, the cylinder capacity of the vehicle, the rate of mileage allowance and the input tax claimed. A good business mileage log covers most of this. Engine size has to be recorded because it decides which fuel rate applies.

What about electric and hybrid cars?

The 2005 regulations concern road fuel, and Notice 700/64 section 8 deals with electricity separately. Where an employee charges an electric vehicle at home, the supply of electricity is made to the employee, and the employer cannot recover the VAT on it. Where an employee charges at a public charging point, the supply is treated as made to the employer, which can recover the VAT subject to the normal rules and detailed mileage records. HMRC says it is still considering what evidence would let employers reclaim VAT when they reimburse the actual cost of home charging. Electric mileage paid at the advisory electric rate of 7p for home charging therefore gives no VAT claim at present. For hybrids, HMRC’s advisory fuel rate guidance says they are treated as petrol or diesel cars, so the petrol or diesel rate for the engine size is used, backed by fuel receipts in the usual way.

What mistakes come up most often?

  • Claiming one sixth of the whole allowance. Only the fuel element counts.
  • Receipts dated after the period end. They cannot support the claim for that period.
  • No engine size on record. Without it the fuel rate cannot be checked.
  • Claiming for contractors. The rules apply to employees as HMRC defines them.
  • Claiming on home charged electric cars. The supply is to the employee.
  • Ignoring partial exemption. Notice 700/64 says the normal partial exemption rules still apply to the input tax claimed.

Company cars where the business pays for fuel are dealt with differently, through full recovery and the VAT fuel scale charge or detailed mileage records.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.