Are you a small business working as a sole trader?
Navigating self-employed car expenses can be tricky. For sole traders, managing car-related costs involves understanding which expenses are allowable for tax purposes. Expenses such as fuel, insurance, repairs, and maintenance must be accounted for accurately. So, let’s dive right in!
Actual costs vs simplified expenses
When claiming vehicle expenses, self-employed individuals can choose between actual costs and simplified expenses.
Actual Costs Method: This involves tracking every expense related to the vehicle. Insurance, fuel, repairs, and maintenance need detailed records. This method is more precise but requires meticulous tracking.
Simplified Expenses Method: This uses a fixed rate per mile for business travel, simplifying record-keeping. While easier, it might not cover all expenses as precisely as the actual cost method. The choice between these methods depends on the individual’s preference for accuracy over simplicity.
Key points of comparison:
- Actual expenses require detailed records.
- Simplified expenses use a fixed rate.
- Example: If driving 10,000 miles a year, simplified expenses calculate at a set rate per mile, whereas actual costs need detailed expenditure tracking.
Calculating business mileage
Firstly, when you’re self-employed, not every mile you drive in your car is considered strictly for business. The tax folks (HMRC) understand that you might run some personal errands along the way, like grabbing a sandwich or going to the store. To figure out how much you can claim for self-employed car expenses, there are two methods:
Mileage allowance payments
Approved Mileage Allowance Payments (AMAP) are standard rates set by HMRC to simplify the process of claiming business travel expenses. For cars and vans, the rate is 45p per mile for the first 10,000 miles and 25p per mile thereafter. Motorcycles are calculated at 24p per mile, and bicycles at 20p per mile.
Using these flat rates makes it easier to claim business mileage without needing to keep detailed records of actual expenses. To maximise your claims, ensure you apply the correct rates to all relevant business trips and maintain basic records of your mileage.
Keeping a mileage log
Keeping a mileage log is essential for accurate and compliant mileage claims. A well-maintained log should include the date of each trip, starting point and destination, purpose of the journey, and the total business miles travelled. This log will serve as evidence in case of an audit and helps in accurately calculating mileage claims.
There are several tools available, such as mileage claim calculator apps or spreadsheets, to make this task easier. Using technology can streamline the process, making it less time-consuming and more efficient. Ensure your log is updated regularly to avoid any discrepancies or missed claims.
How to keep a mileage log
For each trip, record the following:
- Date
- Miles travelled
- Purpose of the trip
You can do this manually with a printed table or use a mileage app or accounting software.
Mileage claim calculator
Once you’ve logged your total miles, you’ll want to calculate how much you can claim. Here’s a breakdown of the two methods:
- Add-Up Method:
Suppose you drove 10,000 miles in a year, with 3,000 for personal use and 7,000 for business. That’s 30% personal and 70% business use. If the total cost of running your car for the year was £4,500, you can claim 70% of that, which is £3,150.
- Simplified Expenses Method:
If you drove 7,000 business miles in the year, you can multiply that by the HMRC’s fixed rate (currently 45p per mile) to calculate your claim. In this case, it’s £3,150.
Parking, tolls, and other expenses
Parking fees can accumulate, especially in urban areas. It’s advisable to keep detailed records of all parking receipts to claim these as business expenses. Toll fees are another consideration, particularly for those frequently travelling on toll roads. To manage these expenditures, maintain a log of toll receipts.
Costs like repairs and maintenance should not be overlooked. Regular servicing can prevent larger, costlier issues down the line. Keeping a thorough record of all vehicle running costs can help justify deductions during tax returns and ensure accurate bookkeeping.
Insurance and tax implications
Vehicle insurance is a significant expense. For self-employed individuals, it’s imperative to have appropriate coverage that includes both personal and business use. While this may raise premiums, it ensures that the vehicle is adequately protected.
Vehicle tax is another key area. Cars utilised solely for business purposes can often attract specific tax allowances or benefits. It’s important to understand these to optimise tax efficiency. Detailed records of business mileage and expenses related to the vehicle are necessary. They support claims and ensure compliance with HMRC regulations.
Reviewing insurance policies annually to align with business needs and keeping up with any tax changes or reliefs specific to business vehicles can lead to substantial savings.
Tax deductions and reliefs
Effective management of car expenses can significantly reduce the tax burden for self-employed individuals. By claiming allowable expenses and capital allowances, one can optimise their tax relief and budget more effectively for the business.
Allowable business travel expenses
Self-employed individuals can deduct business travel expenses from their taxable profit. Allowable expenses include fuel, parking fees, and servicing costs. These deductions can considerably lower the annual tax bill.
However, it’s crucial to keep accurate records to justify these claims to HMRC. For instance, trips for client meetings or deliveries qualify, but commuting from home to a regular workplace does not. Additionally, the cost of business-related tolls and congestion charges can also be claimed.
If a car is used for both personal and business purposes, the expenses must be apportioned accurately. This ensures that only the business-related portion of the costs is claimed as a tax deduction.
Capital allowances for cars
Capital allowances allow the deduction of wear and tear on the car over its useful life. This can be more beneficial than claiming yearly running costs, particularly for expensive vehicles. Under capital allowances, the purchase price of the car is spread over several years.
In the first year, self-employed individuals can claim a percentage of the car’s value under the Annual Investment Allowance (AIA). Depending on whether the vehicle is new or second-hand, differing percentages apply. The remainder of the car’s value can be written down annually through Writing Down Allowances (WDA).
Cars with higher CO2 emissions attract lower allowances, making it prudent to choose more energy-efficient vehicles. This approach not only offers tax relief but also contributes to environmental sustainability, aligning with broader business goals.
Choosing the right allowance method—either capital allowances or running costs—depends on the car’s cost and usage patterns.
Which method is right for you?
Choosing between the two methods depends on your specific situation. The simplified method is easier but might not be the most cost-effective, especially if you have high car expenses.
Are you operating through a limited company?
As a separate legal entity, the company must own the vehicle that you intend to claim expenses on. The tax implications of the company owning your car (with the exception of electric vehicles) often outweigh the benefits/tax saving on the company.
In this case, the best method would likely be the simplified business mileage claim.
Do you have a commercial vehicle?
A commercial vehicle owned by the company would claim all expenses associated with running, such as MOTs, services, fuel, insurance, maintenance, repairs, and even hire costs if you’re renting a vehicle.
The cost of a commercial vehicle can be deducted fully against profits in the year of purchase, known as Annual Investment Allowance.
A commercial vehicle with minimal personal use would have not benefit in kind implications, so no additional tax cost.
If there was personal use of a commercial vehicle, this would be a fixed rate for benefit in kind with low personal tax cost. For example, in 23/24 a basic rate tax payer would pay £858 in tax for the year to make full use of van and fuel.
VAT
Please bear in mind that in all cases there is VAT that can be claimed and potential implications on personal use, so if you are VAT registered, please ensure you get advice from your accountant.
Distinct vehicle types and considerations
Understanding the nuances between various vehicle types is crucial for self-employed individuals managing business expenses. Each type of vehicle presents unique benefits and challenges for cost management and tax deductions.
Cars and vans
Cars and vans are commonly used by self-employed individuals. Cars allow for relatively easy calculation of expenses using either a flat rate per mile or actual expenses adjusted for business use.
Vans, particularly those used for commercial purposes, enjoy significant deductions. Expenses for van maintenance, insurance, and fuel often yield high tax relief. The HMRC allows for a flat rate of 45p per mile for cars and goods vehicles up to 10,000 business miles annually, making this method straightforward for many.
Motorcycles and bicycles
Motorcycles and bicycles often present a cost-effective and eco-friendly alternative for self-employed people. Motorcycles can claim a flat rate per mile similar to cars—usually around 24p per mile for business purposes.
Bicycles, while non-motorised, also attract catering benefits for the self-employed. The cost of a bicycle, including maintenance, safety gear, and accessories, can be claimed. These deductions promote reduced CO2 emissions and lower operational costs.
Hybrids and electric vehicles
Hybrid and electric vehicles (EVs) are increasingly popular due to their environmental and economic benefits. Hybrid cars often enjoy high tax deductibility, potentially up to 95% for those with low CO2 emissions. However, fuel expenses for hybrids might only be deductible up to 50%.
Electric vehicles have distinct advantages, including exemptions from road taxes and congestion charges in some cities. Maintenance costs are typically lower, and government incentives often exist for purchasing EVs. It’s crucial for self-employed individuals to note that initial costs might be higher, but long-term savings and tax benefits usually outweigh them.
Regulatory requirements and records
Proper documentation is essential for self-employed individuals to ensure compliance with legal and tax obligations. Accurate record-keeping and understanding the legal requirements can save time and prevent potential issues with HMRC.
Keeping receipts and records
Maintaining detailed records is crucial. Self-employed individuals should retain all receipts and invoices related to vehicle expenses. This includes fuel, repairs, and other costs. Each business trip should be recorded with the date, miles travelled, and purpose of the trip.
Using accounting software can simplify this process, offering automated tracking and easily accessible digital records. It’s essential to keep these records for at least five years from the submission deadline of the applicable tax year in case of an HMRC audit.
Legal and tax compliance
For legal and tax compliance, self-employed individuals must differentiate between business and personal use of their vehicle. Only business-related expenses can be claimed. For instance, travel between home and work generally does not qualify as a business expense.
Specific rules apply to different legal entities such as limited companies. Directors of limited companies must be particularly vigilant about compliance. They must ensure that their mileage and expenses align with HMRC regulations to avoid fines and penalties. Properly categorising travel expenses and adhering to the latest HMRC guidelines is vital for accurate tax reporting and avoiding complications. For more detailed information on navigating these requirements, visit the Cottons Group blog.
The best advice? Speak with an accountant. If you don’t have one, we offer a free consultation in October.
