How do we and recognise and claim vehicle expenses as a tax-deductible expense is a question I often get asked by sole-trader/self-employed clients.
To respond, there are two ways,
- By claiming mileage expenses (i.e. adopting simplified expenses) or
- By claiming actual motor expenses.
Claiming Mileage Expenses
This is known as simplified expenses method, as it is deemed the simpler and most straightforward way of determining vehicle expenses, as you would be basing your total expenses on a flat rate. In this case you claim expenses based on the mileage accumulated from business trips.
The rate claimed for mileage will be determined by HMRC’s rate for the period. The current rate is 45p for the first 10,000 miles and 25p for the miles used over 10,000
Example: Assuming total business mileage is 35,000. Tax-deductible amount will be £10,750 (the sum of below calculations)
10.000 X 45p = £4,500
25,000 X 25p = £6,250
This method can’t be adopted if your vehicle is built for commercial use e.g. black cabs, dual control driving instructors’ cars)
How to determine miles accrued in a period:
By keeping record and details of business trips made, including date, purpose of the trip and vehicle mileage at start and at end of journey. Also, make sure to make a note of the mileage reading at the start and end of your trading period.
Using the information contained in the mileage log, you will be able to determine your total business mileage for any period.
There are some apps you could use for recording your miles, but you could also maintain a paper record in the vehicle, if preferred. Irrespective of your choice, it is important to maintain this record diligently, as HMRC expects this record to be made for completeness and accuracy of tax returns submitted and may request to see it.
Claiming Actual Expenses
Below are the expenses claimable as expense under this method. In this case, you need to maintain all receipts as evidence of the expenses recorded. The total of all these expenses, is what is used to determine the tax-deductible amount.
Motor expenses you can claim include:
- Vehicle insurance
- MOT
- repairs and servicing
- fuel
- hire charges (if hiring the vehicle)
- vehicle licence fees
- breakdown cover
- Capital allowance.
Note: Fines are not tax deductible
Example: Using the same mileage information contained in the mileage claim example above, assuming 35,000 miles represents 70% of total mileage recorded for the vehicle and the total vehicle expense (after adding together insurance, MOT, fuel, vehicle servicing, etc,) is £15,357 the tax-deductible amount will be £10,750 (i.e. 70% of £15,357).
Other tax-deductible vehicle cost
Additional cost that can be claimed irrespective of the method adopted, are parking fees and toll fees that are directly attributable to specific business trips. 100% of these are tax-deductible, but receipts must be maintained as evidence of the cost.
Important to note:
If you adopt the mileage expense (i.e. simplified expenses) method, you must apply it consistently until the vehicle is no longer used in the business. It is also important to note that the simplified expenses method can’t be adopted for a vehicle on which capital allowance has been claimed.
Final word
In response to another question frequently asked, “NO”, you can’t claim mileage as well as actual vehicle expenses, it’s either or and not both. Doing your tax returns yourself? This is an important point to note!
To determine which is the better option for you, a comparative analysis of both methods, based on the percentage of business mileage you accumulate would need to be performed. To do this, seek advice from your accountant or bookkeeper, or send an email to us at BAnC Services (hello@bancservices.co.uk) and we’ll be happy to help.