Navigating self-employed car expenses can be a bit tricky, so it helps to break it down in an easy-to-understand way. So, let’s dive right in!
Firstly, when you’re self-employed, not every mile you drive in your car is considered strictly for business. HMRC understand that you might run some personal errands along the way, like grabbing a sandwich or going to the store, so to work 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 and business mileage
Now that you’ve picked your method, you need to determine the percentage of your car’s use that is business related. To do this, you’ll need a mileage log. It might seem like a chore, but it’s crucial for tax purposes.
For each trip, record the following: date, miles travelled, and the purpose of the trip. You can do this manually with a printed table or use a mileage app or accounting software.
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.
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.
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 and invoices.
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.
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 no 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 taxpayer 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 is to speak with an accountant. If you don’t have one, we offer a free consultation in October.
Contact Cottons Group on 01604 632116, email enquiries@cottonsgroup.com or visit www.cottonsgroup.com
