Mileage Allowance 2026 for VAT-Registered Drivers: Fuel VAT, Scale Charges and Which Method Wins

If you are a VAT-registered private hire driver, your mileage allowance 2026 decision is really two decisions that most guides blur together. For income tax, you choose between the 55p simplified mileage rate and the business share of your actual car costs. For VAT, you choose how (or whether) to recover VAT on fuel and running costs, and that depends on whether you use standard VAT accounting or the Flat Rate Scheme.

The two choices interact. Your VAT scheme changes the figures you compare for income tax, and your mileage method decides which records you need for VAT. This guide sets out the rules for the 2026/27 tax year, explains the fuel scale charge in plain English, and works through an illustrative example so you can see which combination leaves more money in your pocket. If you need the basics of VAT and mileage first, start with our mileage allowance and VAT FAQ.

Key takeaways

• Under the mileage allowance 2026 rules, simplified mileage is 55p a mile for the first 10,000 business miles and 25p after that. Once you use it for a car, you are locked in until you replace that car.
• VAT on fuel is a separate question. Under standard VAT accounting you can reclaim the business share, reclaim everything and pay the fuel scale charge, or reclaim nothing.
• On the Flat Rate Scheme you do not reclaim fuel VAT and no fuel scale charge is payable. The transport and taxis rate is 10% of VAT-inclusive turnover.
• Your VAT scheme changes the income tax comparison: on the Flat Rate Scheme your actual costs are counted including VAT, which makes the actual costs method relatively stronger.
• Run the comparison when you change vehicles, because that is the only point at which you can switch income tax method.

What is the mileage allowance 2026 for VAT-registered drivers?

The mileage allowance for 2026 is HMRC's flat rate for self-employed vehicle costs: 55p per business mile for the first 10,000 miles and 25p after that. VAT registration does not change the rate. It changes how fuel VAT is handled and which costs you compare against it.

According to GOV.UK's simplified expenses guidance on vehicles, the 55p rate applies for the 2026/27 tax year, replacing the 45p rate that applied before 6 April 2026. The flat rate covers buying, running and maintaining the car, including fuel, insurance, servicing, repairs and depreciation. You can still claim business parking and tolls on top.

Why are income tax and VAT two separate decisions?

Income tax and VAT are different taxes with different rulebooks. Your mileage method decides how much car cost reduces your taxable profit. Your VAT scheme decides how much VAT you pay HMRC each quarter. A choice that wins for one tax can cost you on the other, so test them together.

Simplified mileage is an income tax rule. It appears in HMRC's Business Income Manual and the GOV.UK simplified expenses pages, and nothing in it mentions VAT. Fuel VAT recovery is a VAT rule, set out in VAT Notice 700/64 for standard accounting and VAT Notice 733 for the Flat Rate Scheme. Neither VAT notice says your income tax method controls your VAT position.

In our experience, drivers get into trouble when they assume that picking 55p for income tax means they cannot touch fuel VAT, or the opposite: that reclaiming fuel VAT means they must use actual costs. Treat them as two dials and set each one on purpose.

Can a private hire car use the 55p simplified mileage rate?

Usually yes. GOV.UK excludes cars designed for commercial use, giving black cabs and hackney carriages as examples. A standard saloon, estate or people carrier licensed for private hire is generally not designed for commercial use, so the flat rate is normally available. Purpose-built vehicles need checking first.

Two further rules decide whether you can use the rate. First, you cannot use simplified mileage for a vehicle on which you have ever claimed capital allowances or deducted the cost as an expense. Second, HMRC's Business Income Manual at BIM75005 says that once you adopt the mileage rate for a vehicle, you must use it consistently for as long as that vehicle stays in the business. You can only change method when the vehicle is replaced.

Why the lock-in rule matters more for VAT-registered drivers

VAT-registered drivers tend to be full-time, high-mileage drivers who change cars more often. Each replacement is a fresh chance to choose. If you are about to trade in, run the numbers in this guide before you sign anything, because the method you pick for the new car will apply to every year you keep it.

When do actual costs beat the 55p mileage allowance?

Actual costs beat the mileage allowance 2026 flat rate when your real business car costs per business mile are higher than the blended flat rate. Because the rate drops to 25p after 10,000 miles, a full-time driver's average flat rate falls quickly. At 28,000 business miles, the blended figure is about 35.7p a mile.

That falling average is the key insight for high-mileage drivers. At 10,000 business miles you need actual costs above 55p a mile to beat the flat rate. At 28,000 miles you only need to beat roughly 35.7p. Expensive insurance, a large repair bill or a new car with big capital allowances can push actual costs over that line.

Zero-emission cars are the clearest example. According to GOV.UK's guidance on capital allowances for business cars, a new and unused car with zero CO2 emissions can qualify for 100% first-year allowances, while other cars get 14% main rate or 6% special rate allowances depending on CO2. For a sole trader the allowance is reduced for private use, but a large first-year claim can make actual costs the clear winner in the year of purchase. Remember that claiming capital allowances rules out simplified mileage on that car for good. Use our mileage calculator to estimate the flat rate side quickly.

How does VAT on fuel work under standard VAT accounting?

Under standard VAT accounting, VAT Notice 700/64 gives you a choice. You can reclaim VAT only on business fuel using detailed mileage records, reclaim all fuel VAT and pay the fuel scale charge to cover private use, or reclaim no fuel VAT at all. Each needs different records.

According to HMRC's VAT Notice 700/64 on motoring expenses, if you do not claim any input tax on road fuel, you do not need to account for output tax on private fuel use. If your business funds both business and private motoring, you need either detailed mileage records or the scale charge. Section 5 of the same notice also says VAT on repairs and maintenance can be reclaimed where the vehicle is used for business and the business paid, even if there is some private use.

• Business-only reclaim: keep detailed mileage records, work out the business percentage, and reclaim that share of the VAT on each fuel receipt. Best when private mileage is low and records are strong.
• Reclaim everything plus scale charge: reclaim all VAT on fuel receipts, then add a fixed charge to each VAT return based on the car's CO2 band. No private-use split is needed for VAT.
• Reclaim nothing: no fuel VAT and no scale charge. Simple, but usually the most expensive option for a full-time driver.

Working out the fuel scale charge for 2026/27

The charge depends on two things: your car's CO2 figure, rounded down to the nearest multiple of 5, and the length of your VAT return period. The table below shows selected bands from GOV.UK's road fuel scale charges for 1 May 2026 to 30 April 2027. You start using the new scales from the first VAT period beginning on or after 1 May 2026.

The break-even test: scale charge or business-only reclaim?

Here is a quick test we use with clients. Divide the annual VAT element of your scale charge by the total VAT on your year's fuel. The answer is your break-even private mileage share. If your real private share is higher than that figure, the scale charge is cheaper. If it is lower, business-only reclaim wins.

For example, with £800 of fuel VAT in a year and a car in the lowest band, the break-even point is £108.68 divided by £800, or about 13.6%. A low-emission car with heavy fuel use makes the scale charge attractive even at modest private mileage. A high-emission car with light private use usually points the other way.

What changes on the VAT Flat Rate Scheme?

On the Flat Rate Scheme you pay HMRC a fixed percentage of your VAT-inclusive turnover and generally reclaim no input VAT. That includes fuel. Because you reclaim no fuel VAT, VAT Notice 733 confirms that no fuel scale charge is payable, so the fuel decision disappears.

According to GOV.UK's Flat Rate Scheme rates page, the rate for transport or storage, including couriers, freight, removals and taxis, is 10%, with a 1% discount in your first year of VAT registration. The same page explains the 16.5% limited cost business rate, which applies if your spending on goods is less than 2% of turnover, or more than 2% but under £1,000 a year.

Why fuel matters for the limited cost test

VAT Notice 733 normally excludes vehicle costs, including fuel, from the goods counted in the limited cost test. It makes an exception for businesses in the transport sector using their own or a leased vehicle. For most self-employed private hire drivers, fuel spending is what keeps them above the 2% line and on the 10% rate. Keep fuel receipts even though you are not reclaiming the VAT on them, because they support your limited cost calculation.

Can you reclaim VAT on the car itself?

Sometimes. VAT on buying a car is normally blocked, but VAT Notice 700/64 allows recovery where a qualifying car is intended for use primarily for hire with a driver to carry passengers. Private hire is not named in the notice, so get advice and keep strong evidence before reclaiming.

Leasing follows a similar pattern. The usual rule blocks 50% of the VAT on a car lease, but the notice allows full recovery where a qualifying car is leased primarily for hire with a driver. Under the Flat Rate Scheme, Notice 733 lets you reclaim VAT on a single capital purchase of £2,000 or more including VAT, but it does not address cars in detail, so check before you rely on it. A car bought from a private seller carries no VAT at all, which removes this question entirely.

Does your VAT scheme change the income tax numbers?

Yes, when you use actual costs. Under standard VAT accounting, your car costs for income tax are the amounts after reclaimed VAT. On the Flat Rate Scheme, HMRC expects expenses to be shown including VAT, because you cannot reclaim it. Higher VAT-inclusive costs make actual costs more competitive.

HMRC's Business Income Manual explains that on the Flat Rate Scheme, turnover is usually shown after deducting the flat rate payment and expenses include irrecoverable VAT. Simplified mileage is unaffected: 55p is 55p whichever VAT scheme you use. So the Flat Rate Scheme narrows the gap between the two income tax methods, while standard VAT accounting widens it. For how these figures flow onto your return, see our guide to the Self Assessment return for VAT-registered drivers.

The decision matrix: four combinations compared

One combination needs extra care. Notice 700/64 does not make fuel VAT recovery depend on your income tax method, but GOV.UK does not directly address a sole trader who claims 55p for income tax and reclaims fuel VAT for VAT. If you want to do both, take advice, keep VAT fuel receipts and a full mileage log, and make sure the business percentage you use for VAT matches your log.

How should you choose? A step-by-step method

Work through the steps in order to test your mileage allowance 2026 options, because the VAT scheme affects the income tax figures you compare. Do this when you register for VAT, whenever you change vehicle, and at least once a year as part of your year-end review.

1. Check the vehicle: confirm it is not designed for commercial use and that no capital allowances or cost deductions have ever been claimed on it. If either applies, actual costs are your only option.
2. Measure your miles: use your mileage log to find total miles, business miles and your private share for the year. Our guide to mileage logs and bookkeeping records sets out what to record.
3. Choose the VAT scheme first: compare 10% (or 9% in your first year) of VAT-inclusive turnover with output VAT less reclaimable input VAT under standard accounting. Our VAT calculator helps with the arithmetic.
4. Price actual costs on the right basis: net of reclaimable VAT if you use standard accounting, or including VAT on the Flat Rate Scheme. Add the business share of capital allowances.
5. Compare with the flat rate: 55p for the first 10,000 business miles, then 25p. Remember the lock-in for as long as you keep the car.
6. If you use standard accounting, pick the fuel method: run the break-even test comparing scale charge VAT with VAT on your private fuel share.
7. Record your decisions in writing with the figures behind them, and diary a review for the day you plan to replace the car.

Illustrative example: one driver, every option tested

This illustrative example uses an invented driver and our own figures. Kemi is a self-employed private hire driver who has been VAT-registered for more than a year, so the first-year discount no longer applies. In April 2026 she buys a second-hand hybrid saloon from a private seller for £14,000, so there is no VAT on the purchase. Its CO2 figure is 105 g/km, which puts it in the lowest scale charge band and the 6% special rate pool for capital allowances.

In 2026/27 she drives 32,000 miles, of which 28,000 are business miles (87.5%). Her fuel costs £4,800 including £800 VAT. Servicing, repairs and tyres cost £1,800 including £300 VAT. Insurance and vehicle tax cost £2,900, with no VAT. Her VAT-inclusive turnover is £108,000, and she files quarterly VAT returns.

For income tax, simplified mileage wins under both VAT schemes: by £1,915 on standard accounting and £952.50 on the Flat Rate Scheme. Kemi has not claimed capital allowances on the new car, so she is free to adopt the mileage allowance 2026 rate of 55p, and she will then keep it for as long as she owns the car.

For VAT, standard accounting means output VAT of £18,000 (one-sixth of £108,000), less £1,000 of input VAT on business fuel and repairs, so £17,000. Reclaiming everything with the scale charge would give £18,000 less £1,100 plus £108.68, or £17,008.68, so business-only reclaim wins by £8.68 because her 12.5% private share is below the 13.6% break-even point. The Flat Rate Scheme costs £10,800, which is £6,200 less.

That £6,200 is not all profit. On the Flat Rate Scheme her taxable turnover is £108,000 less the £10,800 flat rate payment, so her profit rises and part of the saving goes back in income tax and National Insurance (NIC). Fuel also matters here: her £4,800 of fuel is well above 2% of turnover (£2,160), so she stays on the 10% rate. Without the transport-sector fuel exception she would be a limited cost business paying 16.5%, or £17,820.

What are the common mistakes and what can they cost?

The costly mistakes are claiming two methods on the same car, reclaiming fuel VAT on the Flat Rate Scheme, and using the wrong scale charge band. Each can lead to extra tax, interest and penalties. HMRC can charge penalties for careless inaccuracies, so check GOV.UK for the current penalty rules.

• Claiming fuel or repairs on top of 55p for income tax: the flat rate already covers them, so HMRC will disallow the extra claim and may charge interest and an inaccuracy penalty.
• Switching from 55p to actual costs while keeping the same car: BIM75005 does not allow it, and the excess deduction can be reversed with interest.
• Reclaiming fuel VAT while on the Flat Rate Scheme: the reclaim is not allowed outside the capital goods exception, so expect an assessment for the VAT plus possible penalties.
• Using the wrong scale charge table or period: the charge must match your car's band and your return length, and errors mean underpaid VAT.
• Ignoring the limited cost test each quarter: a quiet quarter with low fuel spend can tip you onto 16.5% for that period.
• Using a 45p rate for 2026/27 or 55p for 2025/26: the 55p rate starts on 6 April 2026, so check which tax year each return covers.

Key terms

• Simplified mileage: HMRC's flat rate per business mile for sole traders, 55p for the first 10,000 miles and 25p after that in 2026/27.
• Actual costs: the business share of real running costs plus capital allowances on the car.
• Input VAT: VAT you pay on business purchases, which standard VAT accounting lets you reclaim.
• Fuel scale charge: a fixed VAT amount, based on CO2 band and return period, that covers private use of fuel when you reclaim all fuel VAT.
• Flat Rate Scheme (FRS): a VAT scheme where you pay a fixed percentage of VAT-inclusive turnover and generally reclaim no input VAT.
• Limited cost business: a Flat Rate Scheme user with very low spending on goods, who must use the 16.5% rate.
• Making Tax Digital (MTD): HMRC's digital record-keeping and reporting rules, which apply to VAT and, from 6 April 2026, to Income Tax for those with qualifying income above £50,000.

If you are also within Making Tax Digital for Income Tax, these choices still apply. The difference is that your mileage and car costs feed into quarterly updates rather than one annual figure. Our explainer on Making Tax Digital for ride-hailing drivers covers the quarterly routine, and our guide on how to register for VAT as a driver covers the £90,000 threshold.

How UK Driver Accountants helps

We work only with drivers, and we are independent of any ride-hailing app. Our VAT service for drivers covers choosing between standard accounting and the Flat Rate Scheme, the fuel VAT method, scale charge calculations and quarterly returns. We run the four-way comparison in this guide with your real figures whenever you change vehicle. Fixed fees start from £20 a month, and you can see what is included on our pricing page.

Conclusion

The right mileage allowance 2026 answer for a VAT-registered driver comes from setting two dials on purpose: the income tax method and the VAT scheme, plus the fuel method if you use standard accounting. Run the numbers when you change car, keep one mileage log that serves both taxes, and write your choices down. If you want us to run the comparison for you, contact our team for a fixed-fee quote.

Last reviewed 9 November 2026 by the UK Driver Accountants tax team

This article is general information for the 2026/27 tax year and is not personal tax advice. Rules and rates can change, so check GOV.UK and speak to a qualified accountant before acting. If you are dealing with an HMRC enquiry, a VAT assessment or a penalty, we recommend professional representation.