In Marsh (Bolton) Limited and Others v HMRC [2017] UKFTT 0149, the First-Tier Tribunal (FTT) determined that the regulations allowing for employers to recover VAT on reimbursements of business mileage to employees are invalid.

  • Employees submitted expense claim forms.
  • The employer had strict rules on checking the claims and the trips to ensure no excessive mileage was claimed.
  • They were told during an HMRC visit that they could claim more VAT on mileage than they were at that time.
  • At a later inspection, they were asked for supporting receipts and few were provided by employees with their expense claims.
  • VAT recovery was therefore denied.

Under the VAT (Input Tax) (Reimbursement by Employers of Employees’ Business Use of Road Fuel) Regulations 2005, employers can recover VAT on fuel reimbursed to employees for business journeys.

The regulations require the following conditions to be met:

  • The road fuel must be supplied to the employer, but is delivered to and paid for by the employee.
  • The employer reimburses the employee for the fuel (or part).
  • The fuel has been used in full or part for business journeys.
  • The amount of VAT claimed relates only to the business journeys and the amount reimbursed.
  • The employer must hold a valid VAT invoice.

The taxpayer contended the following:

  • There were sufficient other records aside from the VAT invoice to enable HMRC to exercise its discretion and allow VAT recovery.
  • It was clear that the employer had received a supply of goods for use in their business and this meant that they had satisfied the main conditions for VAT recovery.
  • The failure to comply with a formal requirement to hold a VAT invoice does not override the right to deduct VAT.
  • HMRC should have exercised its discretion to allow alternative documents to VAT invoices and should have allowed self-generated documents as alternative evidence.
  • At a previous inspection, HMRC indicated that they could ignore the requirements of the regulations to obtain fuel receipts, giving them a legitimate expectation.

HMRC’s denied the VAT claim citing the following reasons:

  • Any fuel placed into the employee’s vehicle and made in exchange for payment by the employee must have been a supply to the employee not the employer.
  • The regulations do not deem the supply to an employee to be treated as if it were a supply to the employer.
  • If there is no supply to the employer, the regulations do not apply.
  • Although there is a general rule that allows HMRC discretion whether to accept alternative evidence, HMRC are permitted to exclude the general rule when making these particular regulations according to the VAT Act.
  • The regulations do not allow any discretion.
  • There was insufficient evidence to back-up a legitimate expectation.

The FTT ultimately agreed with HMRC that there was no supply to the employer (as required by the regulations), and that there was no requirement for HMRC to use its discretion regarding alternative evidence.

This was not, though, the main reason that the appeal was dismissed.

The Judge determined that the regulations were, in fact, invalid. The section within the VAT Act, under which the regulations have been made, do not allow HMRC Commissioners to make regulations which:

  1. Treat a supply to one person (the employees) as made to another (employers), or
  2. Enable that other person (employers) to recover VAT on supplies to a third party (employees)

Only the Treasury can make such regulations (under s24(4) VAT Act 1994): the Reimbursement Regulations were made by the Commissioners under s24(6) VAT Act 1984.

The Judge concluded that he could not give effect to regulations made by a body with no power to make them. In theory this could jeopardise all VAT claims by employers reimbursing employees for business journeys.

Some important points:

  • There is no suggestion that HMRC would attempt to deny relief where the requirements of the ‘invalid’ regulations are adhered to.
  • If this case is anything to go by, HMRC will have a fall-back argument, that the regulations are invalid, if they want to disregard any VAT reclaim on mileage.
  • As this is a FTT case, it is not binding on other cases.


Our guides:

Advisory fuel rates (company car drivers)

Authorised mileage rates (own vehicle)

Travel (employer’s guide)

Travel (summary for employees)

Case reference: Marsh (Bolton) Limited and Others v HMRC [2017] UKFTT 0149

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