20 Jul Car Expenses
When you use a personally owned car in your business, some of the costs associated with running the car are allowable for tax purposes so you can claim these expenses in your accounts to reduce your profits and pay less tax.
If you’re a sole trader there are two methods of claiming these expenses:
- You can claim 45p for every business mile that you travel up to 10,000 miles. After 10,000 miles the approved mileage rate drops to 25p per mile.
- Claim a proportion of all running costs such as fuel, servicing, repairs, insurance and road tax based on the number of business miles you have travelled. If you use the car privately, you can only claim a proportion of the costs that relate to business mileage, this is usually the ratio of your business mileage compared to your total mileage. You can also claim “Capital Allowances” (a form of tax relief spread over a number of years to reflect the purchase cost of the vehicle) and again these are claimed in proportion to business usage.
The capital allowances you can claim on your car are based on CO2 emissions, which are shown on the car’s V5 certificate. If you buy a new, unused car with emissions of 75g/km or less you can claim 100% allowance. So if the vehicle cost £10,000 to buy, you can claim the full amount as a capital allowance and reduce your tax bill.
For cars with emissions between 96 and 130g/km, capital allowances can be claimed at 18% and 8% for cars over 130g/km. Again, using a vehicle cost of £10,000, if the car has 100g/km emissions, £1800 (18%) would be claimed as a capital allowance in the year of purchase (reducing for personal use if necessary) and the £8200 balance would be claimed in future years.
It is essential to keep a mileage log when claiming actual running costs of the car and capital allowances because any claims made need to be based on the amount of business use and adjusted for any personal use. Keep a note of dates, journeys and the miles travelled together with a note of personal miles so that it’s easy to work out the proportion of business miles to personal miles. At the end of the tax year, if your vehicle has been used for 60% business and 40% for personal journeys, 60% of the total running costs for the year can be claimed and 60% of any capital allowances that are available.
There is no best method to use as it will vary depending on the vehicle, the mileage travelled and the overall running costs incurred. In many cases it is simpler and tax beneficial to use HMRC’s approved mileage rate of 45p per mile. Ask your accountant for advice if you’re unsure of which method is best suited to your circumstances.
If you’re a Director of a limited company, you will be able to claim 45p per business mile when carrying out business journeys in your personal vehicle, again up to 10,000 miles and the rate then falls to 25p per mile. You could also consider selling or transferring your vehicle to the company so that the company takes legal ownership of the car and bears all of the running costs. The disadvantage is that if you’re still using the car for personal journeys, you have been provided with a company car which is a taxable benefit and needs to be reported on a P11D to HMRC who will tax you accordingly.
If you lease a car rather than buying it, the rules are slightly different when it comes to tax relief on the lease payments. Cars with CO2 emissions above 111g/km suffer a 15% restriction on the lease rentals that are deductible against tax, meaning you can only claim 85% of the lease rental. There is no restriction on cars with emissions of 110g/km or less and the full cost of the lease is deductible.