However (like with most business expenses) things are not always as straightforward as they seem. Working out what you can, and can’t, include in your business books can be an extremely confusing process – and if you make any errors you risk incurring the ire of HMRC, who could potentially fine you for paying an incorrect amount of tax.
Here, Emily Coltman FCA, Chief Accountant to FreeAgent – which provides a multi-award winning cloud accounting system for micro-businesses and freelancers – recommends five points to remember if you drive on business.
The journey must be for business purposes
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 stipulations. The main purpose of the journey must be for business, rather than to fulfil a personal need.
For example, if you are doing the school run and make a detour to visit a client or pick up your business cards, the main purpose of that journey would not be for business. Therefore 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 (as opposed to a company car), then you need to follow the rules for employees, because you are an employee rather than self-employed, with the company being your employer. In this situation, if the company pays you back for journeys other than those that HMRC agree count as business journeys, you’ll potentially have extra tax and National Insurance to pay on the costs of those journeys.
For 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”, which means you can’t claim the cost of this back from the company without paying extra tax and NI.
How to work the cost out
If you’re a sole trader, once 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 business’s 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.
What about the cost of 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 holds true 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.
On the other hand, 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 will 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, etc.
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, such as 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, it’s a good idea to discuss this with your accountant to make sure you’re not claiming too much – or that you’re not under-claiming either!
Emily Coltman FCA is Chief Accountant to FreeAgent. FreeAgent provides a multi-award winning cloud accounting system designed to meet the needs of micro-businesses, freelancers and their accountants. Try it for free at www.freeagent.com