Reclaiming VAT on Business Mileage: How the Fuel Element Works

Published 26th August 2026

If your business is VAT registered and you pay employees a mileage allowance, there is VAT sitting inside those payments that you can recover. Not on the whole 55p, which is where most people go wrong, but on the fuel part of it. Done properly across a team of drivers it comes to a useful four-figure sum every year, and it is one of the more commonly missed input tax claims.

The mechanics are not complicated. The record keeping is where claims fall over.

Why you cannot reclaim VAT on the whole 55p

The approved mileage rate is designed to cover insurance, road tax, servicing, depreciation and fuel. Only one of those carries recoverable VAT in the employer's hands. Insurance is exempt. Road tax is outside the scope. The car itself belongs to the employee. What is left is the fuel, and fuel is the only bit you can recover on.

HMRC's method is set out in VAT Notice 700/64. You take the fuel element of the mileage allowance and multiply it by the VAT fraction. At the standard rate of 20%, the VAT fraction is 20 divided by 120, which is one sixth.

Working out the fuel element

The fuel element is the Advisory Fuel Rate for that vehicle, the same quarterly table HMRC publishes for company car fuel. HMRC will also accept published motoring organisation figures such as the RAC or AA rates, but the advisory rates are simpler because they are free, quarterly and beyond argument.

These are the rates from 1 September 2026.

They change on 1 March, 1 June, 1 September and 1 December, so a claim covering a full year uses four different sets of figures. That is the main reason people give up and do it annually with a single rate, which is exactly the kind of shortcut that fails a VAT inspection.

A worked example

Scale that up and it stops being trivial.

A field sales team of five doing 10,000 miles each is £1,416 a year of input tax that most small businesses never claim.

The receipts requirement, and why claims fail

This is the part that costs businesses their claim on inspection. To recover the input tax you generally need VAT invoices for the fuel, and the invoice is issued to the employee at the pump. So the employee has to keep the receipts and hand them in.

Three rules follow from that, and all three are worth putting in your expenses policy:

• The receipts only need to cover the business fuel amount. You are not trying to account for every litre they bought. You need enough VAT receipts to support the fuel element you are claiming on.
• The dates have to work. A claim cannot be supported by a VAT invoice dated after the period the claim covers. A receipt from October does not support August's mileage. Collect them as you go rather than at year end.
• A company fuel card removes the problem. Where the employee buys fuel with a fuel card, credit card or debit card that you provided, you do not need to retain their individual invoices.

What records HMRC expects

Notice 700/64 sets out what you keep for each employee: the mileage travelled, whether each journey was business or private, the cylinder capacity of the vehicle, the rate of mileage allowance you paid, and the amount of input tax claimed.

Cylinder capacity is the one people forget, and without it you cannot show which advisory rate you were entitled to use. Capture the engine size once when a driver joins the scheme, and again if they change car. It takes thirty seconds and it is the difference between a claim that stands up and one that does not.

Electric vehicles are different, and not in your favour

The VAT treatment of EV charging turns on who the electricity was supplied to, and that is not the same question as who paid for it.

Public charge points: the supply of electricity is treated as made to the employer, so the business can recover the VAT on the business proportion.

Home charging: the supply is made to the employee, not the employer, because it goes through their domestic meter under their own contract. That means the employer cannot recover the input tax, even though it is unquestionably paying for business fuel.

This is a genuine gap in the system rather than a technicality, and it matters more every year as fleets electrify. If you reimburse home charging at the 7p Advisory Electricity Rate, budget for it as a gross cost with no VAT recovery attached.

Company cars instead of own cars

Everything above concerns employees using their own vehicles. Where the business runs the cars and pays for all fuel including private motoring, there is a different route: recover the VAT on all the fuel and then account for output tax using the road fuel scale charge, which is a fixed quarterly amount per vehicle based on CO2 emissions.

Whether that beats simply not reclaiming the private element depends on how much private mileage the cars do. It is worth modelling once rather than assuming, and the answer changes when the fleet changes.

Getting Started

If you have never made this claim, the work is mostly setting it up rather than doing it. Record engine sizes for every driver, tell people to hand in fuel receipts with their expense claims, calculate the fuel element quarter by quarter using the rate in force at the time, and put the figure in box 4 of the VAT return alongside everything else.

You can generally correct errors and recover input tax you missed within the normal four-year window, so a scheme set up now can often pick up something for previous periods. That is a conversation for your accountant, with the receipts in front of them.

Work out the mileage payments themselves with our mileage claim calculator, then apply the fuel element and the VAT fraction to the business miles behind them.