As a contractor, I understand I must invoice my client for mileage at 45p per mile plus 20% VAT. This is normal practice.
What puzzles me and which I can not find any answer or discussion on is that there is a rule which states that VAT should not be charged on VAT. Yet, the 45p per mile includes something like 17.5p of fuel inclusive of VAT, and normally an employer can recover the VAT element of this, approx 2.5p per mile. So, when I add 20% VAT to my 45p per mile, I am adding VAT on VAT for the 18p fuel element.
Am I overcharging my client ? Should I actually be calculating VAT on 45p minus 2.5p ?