Claiming for business motor expenses

James Campbell Percy and friends

You have a car, you use it for work, so you want to include it as a business expense, simple surely? Unfortunately, it’s not – travel, and in particular motor expenses are more complicated than your sat-nav directions on a bad day. Here is the what, why and how of motor to help you navigate through.

  • What counts as business travel?

To work out “what” you can claim, you have to start with “why” you are making the journey, then decide if it counts as business travel. Even this is not always straightforward – what counts as business mileage is going to be slightly different depending on your particular circumstances and how you operate. You are not allowed to include your normal journey to work, but beyond that you can include any mileage solely and directly related to your business. It does not just have to be travel to customers; a journey to your accountant would count, as would a trip to purchase materials. Take a look at, What can I claim for travel and subsistence? for more information.

Once you have established what to include for your particular business, it is important to keep a record of your business mileage – more on this later.

  • How do I claim for motor expenses?

We’ve covered the “why” and the “what” so now we move onto the “how” part. There are two main methods of claiming motor expenses: the full cost method and the mileage method. Deciding which to use depends on whether you are a sole trader, limited company , whether you are VAT registered and the nature of your journeys. All rely on good mileage records.

  • 1. Sole Trader

If you are a sole trader (or partnership) and are not VAT registered, then you can choose whether to use the full cost method or mileage method. The choice generally comes down to how much you are using your vehicle for the business.

Full cost method – This method is easier if you are using your vehicle predominantly for work and have little or no personal use e.g. a work van. You include all the costs and then deduct any private use element.

Can claim:
Fuel
Repairs and MOT
Insurance, tax and breakdown cover
Cost of the vehicle – via tax capital allowances

Can’t claim:
Private use element
Fines and penalties

The private use element is based on business miles as a proportion of your total mileage (business miles in the year divided by total miles in the year). If you end up with a three quarters of your mileage directly relating to the business then you can have three quarters of the total expenses. Ideally, as with all methods, you should record your mileage and then calculate a private use figure. However, if you have got to the year end without recording your mileage, an estimated percentage of private use will generally be OK, as long as it does represent your situation.

Mileage method – This method is easier if you are just making a few business journeys in your vehicle, but are mainly using it privately outside the business. To use this method you must be keeping mileage records!

Can claim:
Business mileage allowance at HMRC rate – for cars and goods vehicles (currently this is 45p per mile up to 10,000 miles and then 25p per mile)
Extra journey costs such as toll charges, congestion charge and parking

Can’t claim:
Private use mileage
Fuel
Repairs and MOT
Insurance, tax and breakdown cover
Cost of the vehicle – via tax capital allowances
Penalties or fines

For this method journeys don’t all have to be made in the same vehicle e.g. if you have two family cars, you can include journeys in both.

The mileage rate is designed to take into account the the costs of buying, running and maintaining your vehicle, such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT. The rate also covers depreciation of the vehicle i.e. it’s loss in value over time. You can’t make additional claims for any of these things. If you have claimed the cost of the vehicle through your business via capital allowances, then you can’t use the mileage method and must use full cost method instead.

  • 2. Ltd Company

For a limited company the expenses situation is slightly different because, in most circumstances, the director of a limited company is treated as an employee of the company. This affects who owns the vehicle and also impacts on the director’s personal tax through “benefits in kind”.

Full cost method – If you use the full cost method and claim capital allowances on the vehicle then it effectively belongs to the company. You, as an employee, have use of the company vehicle for business journeys. Unlike a sole trader who can make a deduction for any personal mileage, any private use of the company vehicle by an employee is classed as a “benefit in kind” and is subject to tax through your personal tax return. In short – if you use the full cost method then personal mileage needs to go on your personal tax return (and also P11D) at the end of the year.

You need to think very carefully before bringing a vehicle into the company and using the full cost method. If it truly is a business vehicle with no personal use then this is the best method, but if you do make personal use of the vehicle then the mileage method is probably better.

Can claim:
Fuel
Repairs and MOT
Insurance, tax and breakdown cover
Cost of the vehicle – via tax capital allowances

Can’t claim:
Private use element
Fines and penalties

Mileage method – Using the mileage method, the vehicle remains privately owned and you as an employee can claim a mileage allowance for any business travel. This is the best method if you are making a combination of business and personal journeys. Again this relies on keeping good mileage records throughout the year.

Can claim:
Business mileage allowance at HMRC rate – for cars and vans (currently this is 45p per mile up to 10,000 miles and then 25p per mile)
Passengers for business journeys at HMRC approved rate – (currently this is 5p per mile)
Extra journey costs such as toll charges, congestion charge and parking

Can’t claim:
Private use mileage
Fuel
Repairs and MOT
Insurance, tax and breakdown cover
Cost of the vehicle – via tax capital allowances
Penalties or fines

For this method journeys don’t all have to be made in the same vehicle e.g. if you have two family cars, you can include journeys in both.

  • Does being VAT registered make a difference to motor expenses?

There are some differences in“what” you can claim and the “how” you can claim it depending on whether or not your business is VAT registered. This is a complicated area and may get it’s own separate article in the future.

VAT registered sole traders – You can’t use the mileage method for VAT as a sole trader (unless you have voluntarily registered for VAT and are not exceeding the VAT turnover threshold). For VAT purposes you need to use the full cost method. There are some particular complications around claiming for VAT on fuel.

VAT registered limited company – As a limited company, you can use either the full cost method or the mileage method for VAT. However, if you are using the mileage method you can only claim VAT on the fuel portion of the mileage allowance (remember, the mileage allowance also covers running costs and wear and tear as well as fuel). The HMRC provides an advisory fuel rate to apply to your mileage allowance; this depends on your particular vehicle and changes quite frequently.

  • Remember

Start by working out what counts as a business journey for you

Always record your business mileage – it helps with all methods

The method you chose will depend on the proportion of business mileage compared to personal mileage

Save all your fuel receipts if you are using the motor method or are VAT registered

 

Image – James Campbell Percy and friends