Words by Emily Coltman, FreeAgent
If you run a small business and drive a vehicle during your work, then there’s good news -you may be able to claim some of the expenses you incur on that vehicle in your accounts.
But (like with most business expenses) things aren’t always as straightforward as they seem. Working out what you can, and can’t, include in your business books can be a pretty confusing process - and if you make any mistakes you risk incurring the ire of HMRC, who might fine you for paying the wrong amount of tax.
So, here are five points to bear in mind if you drive on business.
Business purpose journeys only!
If you’re a sole trader, then to claim the cost of your journey, you need to make sure it’s for business, according to HMRC’s conditions. The main purpose of the journey must be for business, rather than a personal one.
Take the school run as an example - if you happen to make a detour to visit a client or pick up your business cards on the way home, the main purpose of that journey wouldn’t be for business. So unfortunately, you couldn’t claim any of the costs of making it, unless you can separate out the detour that was for business purposes and claim only that part of the journey.
Only work-related travel counts…
If your business is a limited company, and you’re travelling on business in your own car (rather than a company car), then you need to follow the rules for employees, because you’re an employee rather than self-employed - with the company being your employer. In this case, if the company pays you back for journeys other than those that HMRC agree count as business journeys, you might have extra tax and National Insurance to pay on the costs of those journeys.
Let’s look at another example - if you regularly commute to a particular client’s site, where you’re spending three days a week, and you expect to be working there for over two years, HMRC count this as travel to a “permanent workplace”, which they call “ordinary commuting”. This means you can’t claim the cost of this back from the company without paying extra tax and NI.
Cost - working it all out…
If you’re a sole trader, as soon as you’ve identified which journeys you can claim for, you can use one of two methods to work out how much to include in your accounts for the costs of owning and running the car.
If your business is a limited company, then assuming the car belongs to you personally, work out how many miles you’ve travelled on business, then use HMRC’s approved mileage rates to calculate how much to claim back from the company. The company can include this amount in its accounts as a cost, reducing its taxable profits.
Cost - buying the car…
If you’re a sole trader and you’re using the actual cost method to claim the business element of your motoring costs, you’ll be able to claim capital allowances on the business proportion of the cost of the car.
If, on the other hand, you’re using the mileage method, this amount includes an allowance for buying the car, so there won’t be capital allowances to claim.
The same applies if your business is a limited company and you own the car - because you own the car, the company can’t claim capital allowances, because the car doesn’t belong to the company.
But if you’re driving a car that belongs to the company, the company can claim capital allowances on the cost of that car. The company can also include all the actual costs of running the car - fuel, repairs, maintenance, etc - in its accounts. The company will, however, have extra NI to pay, and you’ll have extra tax and NI to pay, because the company is providing you with a car as part of your remuneration package.
What about repairs and maintenance?
If you’re a sole trader using the actual cost method, you’ll include in your accounts the business proportion of all the car running costs - repairs, maintenance, insurance - that kind of thing.
If you’re applying HMRC’s rate per mile, whether that’s as a sole trader using the mileage method or as an employee driving your own car, the mileage allowance includes a sum for running costs as well as fuel, so you wouldn’t be able to include anything else apart from costs that relate to specific business journeys, like road tolls and car park tickets.
If the car belongs to the company, the company includes all the cost of repairing and maintaining the car in its accounts.
If you’re not sure how much tax relief you can claim on motoring costs, your best bet is to have a chat with your accountant to make sure you’re not claiming too much - or that you’re not under-claiming either!