When working out the motor expenses of a sole trader and partners, two situations need to be considered:
1. Where you are treating the car as if it is owned by the business;
2. Where you are treating the car as if privately owned.
Before going further, it is important to note that as a sole trader, the business is not a separate legal entity. Therefore, whilst a car can be treated as a ‘company car’, strictly speaking and as far as the HMRC is concerned, legal rules relevant to company cars only apply to limited companies. (Note that PLCs are deliberately left out here as I only deal with small companies.)
SO, returning to our two situations above, let’s consider 1 first:
If the car is being treated as owned by the business, the proportion of private use needs to be calculated.
It’s very unlikely that the HMRC can be convinced of the 100% business use of a car. Remember that all trips between home and the workplace are considered private. Also stopping off at the supermarket for groceries is private use as is picking up a friend/relative at the station.
From experience, arguing the 100% business use of a car is futile even where a huge logo is stuck to the van or car. HMRC can ask for mileage records to prove non-private use.
IF an accurate private use percentage, eg 30%, is determined, what I term the ACTUAL COST METHOD can be used to work out the expenses including capital allowances:
First, the cost of the car is added to Fixed Assets – A car is a capital expenditure.
Now, let’s calculate the deductions:
a. For this tax year (2012/2013), Capital Allowances for cars are set at 20%, so calculate 20% of the cost or the written down value of the car; then deduct 30% from your result. The 70% balance is the allowable capital allowance for that year.
b. Calculate 30% of all costs related to car for the year. The 70% balance is deductible.
c. If the car is on hire purchase, calculate 30% of the interest charges. The 70% balance is deductible.
Sounds simple – Is there a catch?
Yes! The 30% private use percentage applied can’t be guesswork.
Evidence of how the percentage is arrived at must be available and includes:
i. Dates of journeys
ii. Mileage records
iii. Details of business and private journeys
iv. Reasons for business journeys
NOW, let’s look at option 2 where the car is privately owned but used for business journeys:
To work out the deductible expenses, what I term the MILEAGE METHOD can be used. Note that this method can only be used by businesses whose turnover does not exceed the VAT threshold.
As far as this tax year (2012/2013) is concerned, all the owner claims here is 45p per business mile travelled up to 10,000 miles. Thereafter, 25 per mile can be claimed.
As with option 1, mileage records must be kept and available for inspection.
SO, which method is better?
It all depends on the costs. The MILEAGE METHOD is a universal rate – fixed for all types of cars – so a gas guzzler with a high running cost claims the same as a small-engined car. The former might be better suited to the ACTUAL COST METHOD since the claimable mileage cost might not cover the expenses incurred.
Also, if the car is mainly used for business and covers a lot of miles annually, the 25p per mile after the first 10,000 miles will not cover the cost.
The amount of bookkeeping and accounting work needed must also be considered; the MILEAGE METHOD only needs a mileage record of business use whilst the ACTUAL COST METHOD needs records of ALL journeys.
FINAL NOTE: The above does not count as professional advice. To find the best method for your particular circumstances, you might want to contact your accountant or call me via 0780 3704496 or email firstname.lastname@example.org.