Although our VAT rules are largely set by Europe, HMRC can modify them by a derogation if they get EU permission first. One derogation relates to car and other fuel paid for by businesses. However, it seems HMRC exceeded the terms of the permission they obtained from the EU.
Private use
If your business pays for fuel some of which is used for non-business purposes eg an employee's travel from home to work, EU rules say this is a supply of goods upon which VAT is due. Identifying the cost of non-business fuel would mean keeping a log of all private journeys. To avoid this fiddly record-breaking HMRC's derogation allows your business to pay a road fuel scale charge (RFSC) instead to cover the private use. (The present rate and how they are calculated can be found here .)Income Tax
Many businesses ask employees to reimburse the cost of fuel used privately to avoid a benefits-in-kind charge to income tax or national insurance. To do this workers need to keep a record of all their private mileage - in effect, they are folloeing the EU's rules on car fuel.
However, HMRC still expect the business to pay VAT according to RFSC which in most cases is way more than would be due according to the worker's personal mileage record.
TIP
HMRC now admit they got it wrong and here workers reimburse the cost of private fuel, you can in future account for VAT on this amount not RFSC. Even better HMRC also say you can reclaim VAT for previous years but is vague as to how far back you can claim. He says it is four years but I think it may be further.
Summary
You no longer have to pay VAT based on HMRC's fuel scale charge where your employees reimburse you for the cost of private mileage. If it is cheaper, you can pay VAT on the amount reimbursed instead.
