If you are sole trader and need a vehicle for work, you have the following options –
- Using your own vehicle in your business.
- Leasing a vehicle.
- Hiring a vehicle each time you need one.
Usage of personal vehicle
You can use your personal vehicle for business purposes and claim tax relief on the cost of doing so. There are two methods of working out your vehicle expenses
- Claim a flat rate for each mile you travel.
- Calculate the actual cost of using your car or van for work trips.
- Cars and goods vehicles (up to 10,000 miles) – 45p per mile
- Cars and goods vehicles (after 10,000 miles)- 25p per mile
- Motorcycles – 24p per mile
If you choose this option, you cannot claim any other car related expenses except for tolls, congestion charges and parking fees for business related trips. You only need to keep records of business mileage.
Example
Denton is in the construction industry; he is self-employed and travels around the country for his work. At the end of the tax year, his business miles are 30,000.
- 10,000 miles x 45p = £4,500
- 20,000 miles x 20p = £5,000
So total claim for business travel is £9,500.
Actual expenses are what it costs you personally each time you use your own vehicle for business purposes, such as paying for fuel, insurance, maintenance, and repairs.
However, you are required to keep clear records for all expenses claimed, keeping copies of receipts and invoices. Additionally, you need to keep records of your business mileage and total annual mileage.
The amount you can claim is worked out based on the total amount of business miles you travel as a proportion of your total mileage.
Example
Following on from the previous example with Denton, his total mileage for the year was 40,000 and the business mileage was 30,000, so his business usage was 75%.
Denton’s total running costs for the year were £10,000, so Denton can claim £7,500.
So, currently in the above example, the most tax efficient way to process Denton’s expenses would be flat rate option.
Once Denton chooses to use the flat rate option, he cannot change his method until he disposes the vehicle. If you have multiple business vehicles, you can use a different option for each vehicle, an expensive to run vehicle would be more advantageous to claim.
Capital allowances
If you choose the actual expenses option, you can claim capital allowances on your business vehicle that you own.
You will need to check the following –
- Value of car when you bought it for business use or started using it for business use
- CO2 emissions for the car
- Date bought it/started using it for the business
- Percentage of business usage
The next step is to decide which rate pool your vehicle will be included to determine the percentage rate that can claim. Main pool rate is 18% and Special rate is 6%.
- Car bought after 5th April 2021 and CO2 emissions don’t exceed 50g/km – Main pool
- Car bought between 6th April 2018 and April 5th 2021 and CO2 emissions don’t exceed 110g/km – Main pool
- Car bought after 5th April 2021 and CO2 emissions exceed 50g/km – Special rate pool
- Car bought between 6th April 2018 and April 5th 2021 and CO2 emissions exceed 110g/km – Special rate pool
Example
Denton purchased a car for £20,000 and based on the emissions it’s in the main pool. Business usage was 75%.
- £20,000 * 18% (Main rate pool) = £3,600
- £3,600 * 75% (business suage) = £2,700
In first year of ownership, Denton can claim £2,700 as capital allowances to add to his vehicle expenses.
The value of car carried forward for next year’s return is £20,000 – £3,600 = 16,400.
In second year of ownership, Denton uses the car 40% for business usage.
- £16,400 * 18% (Main rate pool) = £2,952
- £2,952 * 40% (business suage) = £1,181
Denton can claim £1,181 as capital allowances to add to his vehicle expenses.
Value of the car carried forward for 3rd year of ownership will be £13,448.
If Denton would sell the car in third year of ownership for £12,000, this leaves a balancing allowance of £1,448. Denton cannot claim the entire amount as also used the car for private usage, so needs to take average business usage for the period owned the car, so in the above example it would be 57.50% (75% + 40% / 2 years of usage). So, Denton can claim £833 for the balancing allowance.
If Denton would sell the car for £15,000, which is more than the current pool value of the car, he would have balancing charge of £1,552. Now based on 57.50% business usage of the car, Denton would need to add £892 (£1,552 * 57.50%) to his taxable profits in the next tax return.
Purchasing new electric car
If you purchase a new electric car or car with zero CO2 emissions, for both personal and business purposes, you can claim 100% of the cost of the car (restricted to your business use) in the year of the purchase.
Example
if you bought a new electric car for £30,000 which was used 75% for business purposes in the year, you would be entitled to deduct £22,500 from your taxable profits in that year. As the tax benefits associated with purchasing new electric cars relate to acceleration and timing, there can be opportune years in which to make this change e.g. a year in which profits are higher than usual, or you have lost your personal allowances because taxable income has exceeded £100K.
Similarly, when you came to sell that car, if you sold it for say £10,000 and in that year were using it only 30% for business purposes you would have a balancing charge of £3,000 (this increases your taxable profits).
Leasing a vehicle
Sole traders can lease a vehicle for business use, but if you also drive it for personal (non-business) journeys, then, like the above, you’ll need to work out the proportion of use. For example, if 40% of your mileage relates to business use, you can claim 40% of the costs.
Following on from the above example, you will not be able to claim the entire 40% of the travel costs, as it depends on the vehicle emissions rate. According to HMRC rates, if you leased a car on or after 6 April 2020 and the CO2 emissions are more than 110g/km, you must disallow 15% of your expenses. If it’s an electric car, you will be able to claim the full 40% of the travel expenses.
Hiring a vehicle
If you only need a vehicle for occasional business use, you may decide to hire one whenever you need it for a specific business journey. You can then claim the cost of hiring the vehicle as a business expense.
