VAT: withdrawal of partial exemption concession in relation to Road Fuel Scale Charges (RFSCs) - reminder of withdrawal and need to consider action

Purpose of this Brief

The purpose of this Brief is to remind taxpayers that the partial exemption concession on Road Fuel Scale Charges (RFSCs) will be withdrawn with effect from 1 January 2014. Taxpayers who currently use the concession need to take action if they are to continue to achieve a fair result following withdrawal.

Who should read this brief

Partly exempt taxpayers who use the RFSCs and the related partial exemption concession.

Background

RFSCs are an optional way of calculating VAT on deemed supplies created when taxpayers allow business road fuel to be used for private journeys. They avoid the need to keep detailed mileage records to accurately calculate private usage.

Where taxpayers are partly exempt and VAT on road fuel is treated as residual declaring RFSCs can lead to unfair results. This is because output tax will be declared on the full value of private use fuel whereas input tax will only be claimable in part on that fuel according to the taxpayer’s partial exemption recovery rate.

The concession corrects this unfairness by allowing the RFSCs to be reduced by applying the partial exemption recovery rate to them. This means that the output tax declared on private use fuel is consistent with the actual input tax deduction on that fuel. However HMRC needs to either withdraw concessions or bring them into law and this concession cannot be legislated.

Consultation and withdrawal of concession

HMRC consulted on correcting errors in RFSCs and bringing associated concessions into law in summer 2012. The consultation set out that this concession would need to be withdrawn and asked whether any particular transitional arrangements would be needed. On 11 December 2012 HMRC published the summary of responses to that consultation, including its conclusions regarding this concession.

The summary announced that HMRC agreed that a long lead in time to the withdrawal was appropriate and that the concession was therefore to be withdrawn with effect from 1 January 2014.

Further information

Partly exempt businesses who wish to continue to use RFSCs from 1 January 2014 must account for the full amount of RFSCs applicable to their vehicles. Input tax on road fuel will continue to be recoverable in accordance with the business’s agreed partial exemption method.

While HMRC consider that the following ‘fuel sector’ formula will give a similar overall VAT result to that realised under the concession, businesses may propose their own alternative.

The suggested formula to calculate the recoverable input tax on road fuel is as follows:

VAT on fuel scale charges + ((VAT charged on fuel purchased in the period - VAT on fuel scale charges) x PE recovery rate)

For example:

VAT on scale charge due - £300.00

VAT incurred on road fuel - £630.00

PE recovery rate 40%

Calculation =

300 + ((630 − 300) × 40%) =

300 + (330 × 40%) =

300 + (132.00) = £432.00 input tax recovery.

The effect of the suggested formula is consistent with the concession that is being withdrawn.

If as a result of the withdrawal of this concession or for any other reason businesses do consider that their current Partial Exemption Method will not give a fair and reasonable recovery of input tax they should contact HMRC requesting a new method. Until formal approval is granted businesses should not adopt this formula or make any other change to their partial exemption calculation method.

Along with any new method proposal businesses need to submit a declaration that the proposed method is fair and reasonable. The declaration needs to apply to the whole method not just the fuel sector. See Public Notice 706 Partial exemption for more information on the declaration.

Another option to ensure a fair and reasonable recovery of VAT following the withdrawal of the concession that does not require a new Partial Exemption Method is to keep accurate mileage records that would allow apportionment of the input tax incurred on road fuel so that only the portion relating to business use is included in the partial exemption calculation. No deemed supply would arise and so the RFSC would not apply.

Alternatively, where taxpayers have a very low partial exemption recovery rate they may prefer to claim no VAT on road fuel and also avoid the need to consider the RFSC.

Issued 4 November 2013

Source: HM Revenue & Customs www.hmrc.gov.uk Copyright Acknowledged.