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HMRC internal manual

VAT Government and Public Bodies

Other local authority activities: miscellaneous (F to M): motor mileage allowances

Local authorities and other section 33 bodies (see VATGPB4000) may pay mileage allowances to employees to reimburse the cost of road fuel incurred on authority business activities. The local authority can recover the VAT as input tax in the same way as other businesses. For more information see Notice 700/64 ’Motoring expenses’ (external users can find the notice at…).

Under The VAT (Input Tax) (Person Supplied) Order 1991 (SI 2306/1991) fuel supplied to a non-taxable person, but paid for by a taxable person, can be treated as supplied to the taxable person so long as certain conditions are met. Section 33 bodies do not act as taxable persons in carrying out their non-business activities, but they can recover the VAT they incur on mileage allowances paid to all persons engaged on the official activities of the authority, including its non-business activities.

This treatment extends not only to employees but also to:

  • councillors
  • Justices of the Peace, and
  • voluntary workers acting as agents of the authority (for example the WRVS delivering meals on wheels).

It also covers mileage rates paid to parents taking their children to school where the authority would otherwise be obliged to provide transport, notably in rural areas, and to police, doctors and linguists.

Recovery of the VAT is conditional on:

  • the individual receiving the mileage allowance not being a taxable person (in other words not registered for VAT)
  • there being a contract (written or oral) between the section 33 body and the individual covering the activities in question
  • the individual carrying out the activity on a regular basis, and
  • the section 33 body being obliged to undertake the activity on which the road fuel costs are incurred, or would have to undertake it if the recipient of the mileage allowance did not do so.

Commonly a mileage allowance is a single payment made up of both fuel costs and wear and tear on the vehicle. Where that is the case an apportionment is necessary to identify the road fuel element. The apportionment may be based on the mileage allowance issued by HMRC or agreed by the National Joint Council for Local Government Service. The rate to be used for VAT purposes should be:

  • agreed in advance between HMRC and the authority
  • based on the scales paid to the staff, and
  • used for all payments in the financial year

The Tribunal confirmed in the case of Leicester City Council (MAN/01/0532) that a section 33 body cannot retrospectively apply a mileage scale that gives a more beneficial VAT recovery. Also VAT cannot be recovered on the travel and subsistence expenses of job interviewees, whether or not they are subsequently engaged. This is because the expenses are seen to be incurred by the interviewee, not the employer.

See also VATGPB8845 on road fuel scale charges.