A Sole Traders Guide to Using their Car in their Business.
When a sole trader uses their own car in their business then the tax man affords them the choice as to how they claim for the expenses in their tax returns. They have this choice if their level of trading/income is within the VAT threshold at the time (currently £83,000).
Route 1 – Proportion of Actual Costs
Under this route you claim a proportion of the actual running costs of the car. This proportion is determined by how much the car is used for business and how much it is used for personal reasons. So for instance if you use the car 10,000 miles a year and 6,000 of these are on business then you can claim 60% of the costs.
In terms of what costs are eligible then you can generally include all costs. The situation is easy when you lease a car as you would simply include all of the leasing costs. There is 1 exception here in that in 2012/13 it was restricted to 85% of the leasing costs if the C02 emissions are in excess of 160g/km.
For purchased cars then the rules are a lot more involved as they are under the capital allowances regime. The size of the capital allowance is determined by the C02 emissions of the car in question.
If the C02 emissions are more than 160g/km then you can claim 10% of the cost of the vehicle per annum, between 110g/km and 160g/km the rate is 20% and for those below 110g/km the rate is 100%.
In terms of the cost of the car that is determined in the above calculation then it includes the cost of the car plus any extras. You cannot recover the VAT on the cars so it also includes the VAT paid as well.
In terms of other costs apart from the purchase/leasing costs then you can include all relevant costs. These include:
- Repairs and maintenance (servicing, MOT, oil, tyres)
- Road fund licence (tax disc)
- Warranty cover
- Breakdown cover
- Interest on a loan to purchase the vehicle
John is a sole trader and travels 12,000 miles a year, 8,000 for business and 4,000 for personal. He leases his car which costs him £350 per month (£4,200 per annum). It is a standard car with C02 emissions of 120kg/km. Included in the leasing costs are road tax, mot and servicing. He pays insurance costs of £550 per year. His only other cost is for petrol and this amounts to £2,000 in the year.
The amount that John can claim are all of the costs of leasing and running the car less those costs incurred for private use. Thus the total costs are leasing £4,200, insurance £550 and petrol £2,000 amounting to £6,750. His business use is two thirds of the total use thus he can claim two thirds of the £6,750-this amounts to £4,500. Thus this amount will go onto his self-assessment tax return as allowable expenses.
Route 2 – Rate Per Mile
As stated earlier this method is only allowable for those sole traders whose income is below the VAT threshold which currently stands at £77,000. Under this method the actual purchasing/leasing costs together with the running costs are ignored and a rate is claimed per business mile travelled. The rate that can be claimed is currently 45p for the first 10,000 miles and 25p for each subsequent mile (unlimited).
Thus this is a far simpler method and all that is needed to be done to comply with this method is to keep a log of your business miles and apply the above rates to the mileage travelled.
Following on from the example above John travels 12,000 miles a year but his business miles are 8,000. Thus he will claim 8,000 miles at 45p a mile, this equates to £3,600.
If all of John’s miles were business then the calculation would be 10,000 miles at 45p a mile and 4,000 at 25p a mile which amounts to £5,000.
Whichever method is adopted it is imperative that you keep an accurate as a log as possible of the business miles. In the former instance this is so you can determine the split between business and personal miles accurately. In the second method used this is so you can accurately claim back all business miles travelled. This log does not need to be too elaborate but would need to record as a minimum the date, miles travelled and purpose of travel (business/personal).
A second matter to consider is the fact that once you adopt one method for a vehicle then you need to be consistent and use this method whilst you use that vehicle. So you cannot complete the calculation each year and see which works out the more favourable and change the method. You complete this calculation in year 1 and then keep that same basis for the life of the vehicle (or at least whilst you use it in your business).