Vat On Fuel Passed Onto Customer

[HenryFord]

I run a company that has 20 self employed drivers. These drivers are not VAT registered, but my company is. The drivers pay for fuel themselves and we pass this expense on to our customers. We repay the drivers for the fuel in full, my customers repay us for the fuel in full. My customers reclaim the vat on the fuel as though they had paid for it themselves. We pay no vat on the fuel nor do we claim any vat on the fuel - we simply pass it on to our customer as though they had paid it and the customer claims the vat back. We have recently had an audit and have been told by the auditors that this may not be acceptable to HMRC and our accountants want several thousand pounds to look into it! Can anyone help- this seems like common sense to me....its an expense for my customers (not for us) so they claim the vat back? Please help, thanks in advance.

[Buenchico]

The reason is that it's unlikely to be acceptable to HMRC is that the VAT system depends upon every transaction being traceable. So if one of your customers is reclaiming the VAT, that customer needs to be able to produce a VAT receipt from the company that sold him the fuel, showing the VAT number of that company, in order that their books of the seller can then be consulted to find the relevant transaction in their own records. Doing it your way the trail becomes broken, meaning that there is scope for fraudulent activity.

I suggest speaking to HMRC and seeking their advice. In view of the fact that your past procedure has simply been 'erroneous', rather than 'fraudulent', and that HMRC has not lost revenue because of it, they might well indicate that no further investigation is needed (saving you lots of money in accountancy fees). They might also suggest the best way to do things in the future.

[ummmm]

Yes..make an appointment with your local tax office. They are extremely helpful....and free!

[HenryFord]

Thank-you for your answers, that has explained a great deal to me, much appreciated

[Dogsbody2]

VAT is chargeable, where applicable, on the value of the goods or services supplied. By handling it in the way you are, you are treating the VAT paid by the drivers as a 'tax deductible expense', in the same way that you might be permitted reimburse the expense cost of a sandwich incurred during a long trip where a meal break was necessary. VAT doesn't work like that.
Contrary to what Buenchico says, the Revenue does lose out. Firstly the drivers cannot be paid for the VAT as an expense, which they then presumably do not declare for SA income tax and NI purposes - the whole sum paid by you to the driver is part of their income.
Secondly, if you are including this cost in an invoice to pass onto a customer and your business is VAT-registered, as you are, this cost must have VAT levied on it.
Traceability is but one small part of it.
Stating the blindingly obvious, there has to be a reason for wanting to attempt to do it this convoluted way in the first place - to save someone money. If someone saves, someone else (aka HMRC) loses.
The VAT arm of HMRC are on a helpline at 0845 010 9000; local tax offices do not deal with VAT.

[HenryFord]

The reason for doing it this way is to avoid using fuel cards which are open to abuse and create additional admin. We just act as middlemen and never make (or lose) on fuel, we just pass it on. If the customers had paid for the fuel themselves (for example by way of a phone call from the driver to the customer who then paid the garage over the phone and had a receipt sent to them), then effectively the same outcome would be achieved - ie the customer pays for the fuel to move the vehicle and can claim the vat back- however for obvious reasons this is not a possible to do - the customer authorises us to pay for the fuel and we authorise the driver. I fail to see where the HMRC could lose out in this scenario. Customers are just claiming back vat on a direct expense incurred by them for having the vehicle moved. All help much appreciated. Thanks

[Dogsbody2]

Don't dispute the outcome is the same (as if customer phoned garage and says fill this man's van and charge my CC). That way would avoid the charge.
Do dispute that, doing it the way you do it, VAT is chargeable on the total value of the services you supply - including that your non-VAT registered SE drivers can't get their VAT back, so you can't treat it as a pass-through cost.
I do hope these drivers own the vans and do work for other customers - otherwise you may find you have employees you didn't realise you had.

[Skyline D]

I'm unconvinced that in practice there's any problem here. I know several businesses which operate in that way, many of whom have had VAT inspections in the past without it ever being queried. However, HMRC may have decided to focus on it as a new area to attack for all I know.

It's not really any different to every single solicitor in history passing on outlays within legal transactions direct to the customer including VAT where appropriate.