Self-employed travel is actually more complex that many people think, so here’s our overview of the key rules.
Is it relevant?
As a reminder, the simple(?!) rule for whether something is tax deductible is that it needs to be incurred ‘wholly and exclusively for the use of the trade, profession or vocation.’
However, more often than not with tax expenses, there are many years of established ‘rules’ that form layers on top of this “simple” rule.
Motor costs are no exception!
A quick myth bust
There seems to be a misunderstanding/myth that the rules for getting a tax deduction as a self-employed person are faaaar better than the options for employees. In our opinion this is not true, as you will see.
When claiming motor expenses as a self-employed person, you have two options in the way you can get tax relief:
- Actual expenses, less a percentage for any personal use of the vehicle
- A HMRC-approved flat rate mileage expense
Before you claim anything, it’s key to understand what trips are allowable against your tax bill. You can see this in our last blog on business travel for the self-employed.
Method #1 – Actual Expense
You can claim for any vehicle that you use in your business. You total up all of the running costs for each vehicle, which include things like:
- Repairs and servicing
- Oil, consumables, etc
- Interest on finance attached to the vehicle
If your vehicle is partly for your own private use, you need to disallow some of the cost. For example, you might decide that you use your vehicle:
- 80% for business use
- 20% for personal use
Therefore, if your total costs were £6000, you would disallow £1200 of your motor expenses, and only claim £4800.
In an ideal world, to prove this % you should keep a mileage log of your business and non-business journeys.
Does it matter how I financed my vehicle?
In a word, yes. As you can also claim the cost of the car, how you ‘bought’ it does matter.
Some of the current ways of financing a vehicle can mean you don’t actually own it (or at least, count as owning it for tax purposes). An indicator that you might not own the vehicle for tax purposes is where you see VAT being charged on each month’s payment, or if you see references to ‘rental’.
– I bought my vehicle
If you bought it on ‘true’ Hire Purchase, loan or outright with your own money (for example), you will have to deal with the Capital Allowance rules to claim the cost of the car for tax purposes.
The Capital Allowance rules allow you to claim some of the cost of the car against your tax bill each tax year. The rate at which you are allowed depends on a number of factors, including what type of vehicle it is (car or van), and the CO2 emissions.
In some cases, you might even get the full amount of the cost of the car in year 1! You can see HMRC’s help page for more details on this.
– I rent or lease my vehicle
If you rent or effectively lease the vehicle, then the rental payments go in with your overall expenses calculations. There are pros and cons to both way of ownership, and the tax treatment may vary. Ask your accountant or book a consultation with us to discuss in more detail.
Method #2 – Simplified Mileage Rate
This is usually the simpler option. Until the recent increases in the cost of fuel, this was also often the most tax efficient option. In many cases it still is, but as the rates haven’t moved for a few years, it is worth doing some rough figures on your situation.
HM Revenue & Customs publish mileage rates, which are meant to take into account not only the fuel cost of the car, but also the running costs of the vehicle.
They are (at the time of writing):
|Vehicle||Flat rate per mile with simplified expenses|
|Cars and goods vehicles first 10,000 miles||45p|
|Cars and goods vehicles after 10,000 miles||25p|
Claiming using the Mileage Rate method is simply a case of:
1. Keeping a log of all qualifying business journeys
2. Multiplying the mileages by the appropriate rate from above.
This is then the figure to claim on your tax return for that cost.
What about VAT?
We’ve not covered VAT in this basics blog, but in summary some VAT maybe claimable if you are VAT registered. It is very unlikely you would be able to recover VAT on the car itself as a self-employed person.
The VAT rules are detailed enough that it would require a blog or two to cover, so maybe another day!
A final tip
As with all tax-deductible expenses, the key is to Keep. Good. Records. Accurate records ensure you have claimed the maximum (correct) tax deduction and can also justify your claim in case of an HM Revenue & Customs inspection.
Any questions about motor basics for the self-employed?
First of all, ask your accountant, as they’ll know your business well. If you don’t have an accountant, or feel you aren’t making the most of claiming travel and motor expenses with your current accountant, we’d love a chat about how we can help.