Motor Expenses: simplifying the principles behind this common business cost
Anees from our accounts team looks at two quite distinct options that sole traders need to discuss with their professional advisers.
Many sole traders will nowadays need to travel in order to help the business grow and increase turnover. With new cars being advertised heavily – and especially with attractive lease and finance schemes being made readily available – it is important to understand the nuances of whether these costs can be allowable as a business expense.
As such clients will often own, or have use of, vehicles that are used for commercial travel. Knowing how these costs can be expensed through the business accounts can be a confusing matter – which is where we, at Page Kirk, can help, leaving you to get on with the running of your business.
Essentially, there are two options when expensing motor costs through the accounts:
- Actual Cost Method
- Mileage Rate Method
In both cases, it is important to ascertain what proportion of the costs are related to business travel only. This is often more straightforward with the Mileage Rate Method, but when using the Actual Cost Method, you need to establish what you would consider to be a reasonable proportion of your travel that relates to business (e.g. 80% business use).
Actual Cost Method
This method allows all costs to be expensed through the business, so it is worth keeping every receipt! Examples include: MOTs; services; insurance; breakdown cover; repairs; fuel and road tax.
This method has the advantage of allowing the capital cost of the purchase of the vehicle to be eligible for an accounting treatment known as Capital Allowances. This essentially applies an annual allowance rate (depending on the CO2 emission of vehicle) to be applied to the initial cost of the vehicle, and is deducted annually for the business in line with the current rates. Effectively, it allows for depreciation on the vehicle on an annual basis, for the period of ownership.
It is worth bearing in mind here that, if you were to purchase a low emission vehicle (e.g. a hybrid/electric model), the capital cost of the car would likely be eligible for something known as a First Year Allowance. This means that if your car meets the criteria, then the capital cost incurred will be fully deductible in the year of purchase (for the business use portion).
Mileage Rate Method
This method simply applies a flat rate to the amount of business miles that you drive in the year. No additional expenses can be claimed for the running costs.
Under the Mileage Rate Method, there are no capital cost allowances for your vehicle. There is, however, an option to include interest payments – restricted to business mileage against actual mileage used as a percentage of cost – claimable against business profits.
The first 10,000 business miles in the year are an allowable expense at a rate of 45 pence per mile, as per HMRC rates. This is more than the average cost for fuel per mile, as the rate takes into account the wear and tear of your vehicle. Any mileage in excess of the first 10,000 miles in the year is allowed at a rate of 25 pence per mile.
You should be aware that whatever method you adopt, you cannot switch to another method while that vehicle is used in your business. In addition, if you opt to lease a vehicle instead of owning one, then no capital allowances are allowed. Instead, you can deduct the annual cost of the lease as a business expense in the year in its entirety (restricted to the business use element of the car).
Deciding which method to apply in your accounts with your motor expenses can be a tricky decision. What can make it even more complicated is the choice over whether to lease or own your vehicle (especially with the recent social trend towards leasing). At Page Kirk, we have dedicated specialists in both accounts preparation and taxation who can advise you on the best course of action.
If you would like any more information, please call us on 0115 955 5500 or email enquiries@pagekirk.co.uk.