Are you a small business working as a sole trader?
Navigating self-employed car expenses can be a bit tricky, but we’re here to break it down for you in a friendly and easy-to-understand way. So, let’s dive right in!
Business Mileage: What Counts?
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:
Adding Everything Up
This method involves adding up all the expenses associated with running your car, such as MOTs, services, fuel, insurance, maintenance, repairs, and even hire costs if you’re renting a vehicle. You’ll also factor in capital allowances if you bought the car.
HMRC Simplified Expenses
Alternatively, you can opt for HMRC’s simplified expenses. With this approach, you calculate how many business miles you’ve driven and apply a fixed rate per mile to it. This method is straightforward but has some limitations. You can’t use it if you’ve already claimed capital allowances for your vehicle or if your car is primarily for commercial use, like a taxi or a driving instructor’s car.
Once you choose one method, you can’t switch back and forth unless you change your car.
Calculating Personal vs. Business Mileage
Now that you’ve picked your method, you need to determine the percentage of your car’s use that’s business-related. To do this, you’ll need a mileage log. Yes, it might seem like a chore, but it’s crucial for tax
How to Keep a Mileage Log
For each trip, record the following:
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.
Additional Car-Related Costs
Don’t forget about other expenses like parking and toll fees. You can claim parking fees for client meetings, and if you use toll roads for business trips, you can claim the full cost.
Tip! Consider investing a small fee for a digital accountancy software such as Xero – you can scan all your receipts and keep records all in one place. Plus, it’s also great for automating payments & invoices.
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.
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.
The best advice? Speak with an accountant. If you don’t have one, we offer a free consultation in October.