If you’re self-employed and own a car you’ll probably have some motoring expenses which can be used in your annual accounts in order to reduce your tax bill.
Claiming your motor expenses can be a little trickier than most of your other business expenses, as it is highly likely that your car will have a mixture of both business and personal use.
Because of this duel use, you cannot simply collect your receipts and offset them all against your profits.
Self-employed individuals who use their cars for business purposes are entitled to claim tax relief on a percentage of their motoring expenses.
Motoring expenses come in two forms:
- The cost of the vehicle itself
- The running costs
Tax relief is available for the cost of the vehicle in the form of capital allowances, generally 10% or 20% per year, depending on the car’s CO2 emissions.
Self-employed individuals can also claim for running costs of the vehcile, which include:
- Repairs and maintenance (servicing, MOT, oil, tyres, etc)
- Road tax
- Breakdown cover (AA, RAC, etc)
- Warranty cover
- Interest on a loan or other finance to purchase the vehicle
The percentage of motoring expenses on which self-employed business owners can claim tax relief is found by comparing the number of business miles travelled during the year with the total miles travelled.
How do you work out the business proportion?
You need to keep a mileage log. HMRC don’t like it if you just make a best guess, so this is something you really can’t get out of.
This means making a note of all the journeys you travel in the vehicle, including:
- The date of the journey
- The car’s mileometer reading at the start of the journey
- The car’s mileometer reading at the end of the journey
- Take one away from the other to get the miles travelled
- Whether the journey was on business or for private purposes
- If the journey was for business, what it was for
Then, when you come to do your accounts, add up all the business miles, add up all the private miles, work out what proportion was for business – and claim that much of each cost as motor expenses.
The Mileage Allowance
If your business turnover is below the VAT registration threshold (currently £85,000), you can ignore your actual motoring expenses and claim tax relief at the following fixed business mileage rates:
- 40p per mile (first 10,000 miles)
- 25p per mile thereafter
If you are a company owner and use your own car for business purposes you will be familiar with these mileage rates. They are identical to the ones used by company owners to reimburse their own business travel.
If you want to calculate your motoring tax deduction using these business mileage rates, you cannot then claim either your actual running costs or capital allowances for the vehicle.
Can you switch between mileage and business usage?
You can only use one method of calculating motor expenses per vehicle and you cannot switch between methods.
This is why I recommend running both mileage and business usage alongside each other for the first year or at the very least, the first few months to work out which is the method which will bring you the most tax relief.
I appreciate that this is a bit of a faff, but it should give you a better idea of what one works out more favourable for you.
What about if I hire the car?
If you hire a car for a business journey only, you can claim the full cost of hiring the car.
If you hire a car for mixed travel, that’s another issue entirely and it would come under the rules for travel which HMRC have published guidance about.
Which method should you use?
There is no right or wrong method to use in order to calculate your business related motoring expenses, it all comes down to which method provides you with the most tax relief.
Therefore if this is your first year (or first time) claiming motor expenses, I recommend that you run both methods side by side and then select which is more beneficial for you.
To be absolutely sure which method will suit you and your business best, talk to your accountant or alternatively if you would like any further information please feel free to get in contact here