VAT recovery on road fuel: changes for partially exempt businesses

Practitioners are often faced with the problem of how to handle input VAT incurred by a business on the purchase of fuel.

The difficulty is that fuel is often consumed in part for private purposes, whereas input VAT can only be claimed in proportion to consumption for business purposes.  To avoid the need to keep detailed mileage records showing private and business usage, HMRC permits the Fuel Scale Charge to be used.  This entitles businesses to recover input VAT in full and to declare a fixed amount of output VAT.

On 4 November 2013 Revenue & Customs Brief 33/13 was published summarising new legislation affecting the Fuel Scale Charge, taking effect from 1 February 2014.  The change will affect the way the Fuel Scale Charge applies for partially exempt businesses, such as schools, care homes, financial advisers, insurers, banks, or any business making a mixture of taxable and exempt supplies.

Such businesses are unable to reclaim all the input VAT incurred on overheads including fuel.  As a result, they would recover a portion of the input VAT on their fuel costs, but still declare in full the output VAT determined by the fuel scale charge.

An extra statutory concession (ESC) permitted the fuel scale charge to be reduced according to the business’ partial exemption ratio (PE recovery rate).  This ESC will be withdrawn and will be replaced by a different formula in legislation, as follows.

New formula:

Output VAT per Fuel Scale Charge

+ (PE recovery rate% x (input VAT on fuel purchased – output VAT per Fuel Scale Charge))


PE recovery rate: 40%

Input VAT on fuel purchased: £630.00

Output VAT per Fuel Scale Charge: £300.00

Calculation: 300 + ((630 – 300) x 40%) = £432.00 input VAT recovery

Mathematically, the formula achieves the same net effect as the ESC before it.  The first part of the formula simply returns to the business any output VAT declared for the Fuel Scale Charge.  The second part restricts input VAT recovered by the PE recovery rate and re-introduces the output VAT on the Fuel Scale Charge (but now restricted by the PE recovery rate).

It is important to emphasise that this arrangement might not be appropriate for all businesses.  If the formula does not produce a fair result for the business, it has the option of contacting HMRC to agree a different method.  Alternatively, some businesses with only a small input VAT recovery on fuel expenditure might decide it is not worth the calculation and might prefer not to recover the input VAT, which in turn means there is no deemed supply to which the Fuel Scale Charge could apply.

Partially exempt businesses should now be considering how they will amend their systems to take account of the new formula for Fuel Scale Charges.

For further information on Fuel Scale Charges or partial exemption computations, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.