If you’re self-employed and you use your car or van for work, it makes sense that your motoring expenses are tax-deductible, right? Right. As with everything, the reality is a little more complicated. Let’s take a closer look.
When are motoring expenses tax-deductible?
You’re self-employed and regularly drive a car or van to meet clients, suppliers, your accountant and the bank manager. Obviously, you’ll be able to claim all your motoring expenses against tax?Well, no. As with most things, what’s tax-deductible in the motoring world is much more complicated than we’d like it to be. Here’s the lowdown, beginning with what counts as business travel.
What counts as business travel?
When is business travel not business travel? Why are you making the journey? The key with this is that any mileage you claim must be solely and directly relevant to your business. So, let’s look at what doesn’t qualify as a business trip.HMRC is pretty clear that simply driving to work – your daily commute – is definitely not a business trip. Let’s say you drive to the office, pop out to meet a client, then go back to work and finally drive home at 5 pm. HMRC tells us that only the journey in the middle to meet the client can be described as business mileage.If, however, you go to meet a client straight from home, then drive into the office, then drive back home again, it might be possible to claim for the first two journeys, so long as you can prove they’re a noticeably different trip to your usual commute.If you bob down to the office in the evening (outside your usual hours), we’re sorry but you can’t claim for that, either.Just to muddy the waters, HMRC has a 24-month rule for freelancers or contractors asked to work in a different place temporarily. They say that you can claim back mileage to and from your main place of work only if you’ll be there for less than 24 months. Any longer than that and the taxman sees it as your permanent place of work.But what other motoring expenses are tax-deductible? That depends on how your business is set up.
Sole trader
Sole traders or partnerships that are not VAT-registered can choose between the full-cost method or mileage method. It all depends on how much business use your vehicle gets.
Full-cost method This is the way to go if you use your vehicle mainly for work with barely any personal use, for example, a van. Add up all your costs, then deduct the costs of private use.
Claim for:
Fuel
Car repairs and MOT
Road tax, insurance, breakdown cover
The capital cost of buying the vehicle
Don’t claim for:
Private use element
Speeding fines and other offences
So how do you work out the private-use element? Simply divide your annual business miles by your total miles. It’s key to record all your mileage and then work out your figure for private use. If you don’t keep an accurate record, you can provide an estimate of private use, provided you can prove it’s realistic.
Mileage methodThis works best if you mainly use your vehicle privately, with just the odd business trip. Note that it’s vital to record all your mileage if you’re using this method.
Claim for:
Business mileage allowance at HMRC rate – 45p/mile up to 10,000 miles, then 25p/mile
Note that, with the mileage method, you don’t need to make all your trips in one car. If you’re a two-car family, either car will be fine.The HMRC mileage rate takes into account all your motoring costs – filling up, topping up with oil, servicing, insurance, repairs, road tax and annual MOT. This rate also takes account of depreciation. That’s why you can’t make separate claims for these elements. If you’ve claimed the cost of buying your car or van using capital allowances, you’re restricted to the full-cost method.
Limited company
When it comes to limited companies, things are different. That’s because, if you’re the director, the law sees you as an employee. This determines who owns the car or van and affects your personal tax through ‘benefits in kind’.Full-cost methodWith the full-cost method, the car belongs to the company and you can use it for business trips. Sole traders can deduct personal mileage, but employees’ private use is seen as a ‘benefit in kind’ that must be declared on your tax return and P11D at year end.It’s wise to be cautious when considering the full-cost method. If there’s absolutely no personal use, then it’s the best way forward. But if some personal use is involved, you’re probably better off with the mileage method.Claim for:
Fuel
MOT and repairs
Tax, insurance and breakdown cover
Buying the vehicle
Don’t claim for:
Private use
Speeding fines and other offences
Mileage methodWhen you use the mileage method, the car or van is privately owned. As an employee, you simply claim a mileage allowance for your business travel. With a mix of personal and business journeys, this is the best way forward. As with all motoring expenses, make sure you track your mileage accurately throughout the year.Claim for:
Business mileage allowance at HMRC rate – 45p/mile up to 10,000 miles, then 25p/mile
Passengers for business journeys at HMRC approved rate (currently this is 5p per mile)
Tax, insurance and breakdown cover
Toll charges
Congestion charge
Don’t claim for:
Private use
Fuel
MOT and repairs
Tax, insurance and breakdown cover
Buying the car
Speeding fines and other offences
Note that, with the mileage method, you don’t need to make all your trips in one car. If you’re a two-car family, either car will be fine.
Does VAT registration affect motoring expenses?
So, what happens if you’re VAT-registered and claiming mileage expenses? What you can claim and how you do so differ slightly. Here’s the simplified version of what is a tricky area.Sole tradersIf you’re a sole trader, you won’t be able to use the mileage method for VAT, assuming your turnover is reaching the VAT threshold. If you’ve voluntarily registered for VAT and aren’t reaching the threshold, you’re OK. So, use the full-cost method, but bear in mind that claiming for VAT on fuel comes with a few complexities. Limited companyLimited companies can use either the full-cost or mileage method for VAT. With the mileage method, you can claim VAT only on the fuel part of the mileage allowance. It’s worth remembering that the mileage allowance doesn’t just take fuel usage into account: it’s all about wear and tear as well. HMRC has an advisory fuel rate, which changes regularly.
Gauge your ratio of business and personal mileage, then choose the best method
If using the full-cost method or you’re VAT-registered, keep your fuel receipts in a safe place
How do you log your business mileage?
The best way to log your business mileage is to install a mileage-tracking app on your phone, such as MileIQ. MileIQ runs in the background, catching your drives automatically. It tracks your miles and creates a comprehensive record of your journeys.You simply swipe right for business drives and left for personal drives. It’s also easy to add details such as parking, tolls or drive purposes to suit your specific needs. The web dashboard allows you to generate highly customizable weekly reports.With MileIQ, there are no buttons to press to start or stop – it simply automatically logs your miles and creates a complete record of all your tax-deductible and reimbursable mileage.You can add your vehicles, purposes and locations. There’s no complicated set-up needed to get MileIQ up and running. However, if you’re serious about reducing your work and getting the most out of your mileage tracking, you can personalise every drive with the customisation features.You can even trial MileIQ for free. Let’s get started today.
