Employers face VAT overclaiming pitfalls

Employers could be liable for overclaiming on VAT under new tax rules and legislation being introduced by HM Revenue & Customs that require firms to produce VAT receipts – a leading tax expert has warned.

Many employers have welcomed the new rules, which were unveiled at the end of last year and allow organisations to claim VAT on fuel bought by pay-and-reclaim drivers provided they have a VAT receipt for each purchase.

Effective from this month, it clarifies the position on claiming VAT following the EU’s Sixth VAT Directive of March 2005 which stated that employers could not reclaim VAT unless the company was billed directly, such as through a fuel card. Prior to the directive, employers made adjustments based on a scale charge in relation to the size of their fleet and submitting receipts was never a concern.

But Alistair Kendrick, tax partner at accountancy firm Wilder Coe, has warned that where employers base their VAT claims on the total price paid at the pump, they could end up being liable for overclaiming on VAT, because most pay-and-reclaim drivers use part of the purchase for private use.

"If you spend £60, and the employer is reimbursed based on £60, the employer will overclaim VAT," said Kendrick.

Faced with this problem, Kendrick said many employers are likely to abandon the VAT reclaim. Where organisations have systems able to track the correct VAT, they will still need to be cleared with HM Revenue & Customs, he added.

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However, a HM Revenue & Customs spokesman said the tax collection organisation did not intend to over-complicate matters.

"If a car uses five gallons over 200 miles, and [the receipt] shows 6 gallons, bosses should only be claiming five gallons."