Motor expenses for sole traders and partnerships
If you drive your own car to travel on business, can you claim any of the costs of that, to reduce the amount of tax you pay for your business?
The answer is yes. But how you do that is a bit complicated!
Note that different rules apply for directors and employees of limited companies. This article is just for sole traders and partners.
Who owns the car?
Remember, when you're a sole trader or a partner in a non-limited-liability partnership, legally there's no difference between you and your business, so for you there's no such thing as a "company car".
The only issue to think about would be whether you own the car or have hired it from, say, a car club or hire firm. We'll look at that later.
First we'll look at what happens when you own the car.
For what journeys do you use the car?
The car will almost certainly have some private use as well as business use. For example, you might use it mainly to travel to visit clients, but you'll also go to Tesco / Morrisons / Waitrose / wherever to stock up on food for your family.
HMRC are very unlikely to accept that a vehicle is for business use only, unless it's something like a van with your logo on the side, or a taxi. Even then, a sharp-eyed inspector might ask to see your mileage log. More about that in a moment.
So I can just add up my business mileage and use the HMRC approved rate, right?
You're allowed to do it that way (which I’ll call the "mileage method"), if, and only if:
- You do use HMRC's AMAP (Approved Mileage Allowance Payments) rate for the kind of vehicle you're using, which might be a car, van or motorbike. You can't claim more than that.
- You don't claim any other costs for running that car - so you can't claim anything for the costs of servicing, repairs, MOT or wear and tear, because these are all covered by HMRC's AMAP rate. However, you can claim the business part of interest on a loan you've taken out to buy the vehicle.
- Once you've chosen to use the mileage method, you keep using it until you sell that car and buy another one. You can't change from the mileage method to the full-cost method, or back again, unless you change vehicles. And remember, when you buy the new vehicle, your business's annual turnover must be under the VAT registration threshold at that time.
What if I can't use the mileage method?
You have to use what I'll call the "full-cost method" instead.
What's the full-cost method?
You add up everything you've spent on the car during the year (petrol, servicing, repairs, MOT), then work out the business proportion of that, depending on how much you use the car for business journeys and how much for private journeys.
You'll also be able to claim capital allowances on the business proportion of the initial cost of the car.
How do I work out the business proportion?
You need to keep a mileage log. HMRC don't like it if you just make a best guess, so this is something you really can't get out of.
This means making a note of all the journeys you travel in the vehicle, including:
- The date of the journey
- The car's mileometer reading at the start of the journey
- The car's mileometer reading at the end of the journey
- Take one away from the other to get the miles travelled
- Whether the journey was on business or for private purposes
- If the journey was for business, what it was for
Then, when you come to do your accounts, add up all the business miles, add up all the private miles, work out what proportion was for business - and claim that much of each cost as motor expenses.
Eh? I'm lost.
OK, let's take an example.
You travelled 900 miles in October, of which 500 was on business and 400 was private.
In October you spent £60.00 on petrol. £60 x 5/9 = £33.33. So, if you're managing your expenses with FreeAgent, you'd split the payment of £60 into £33.33 which goes to Motor Expenses, for the business journeys, and £26.67 which goes to Drawings, for the private mileage.
Do I still need to log all my private mileage if I'm using the mileage method?
No, you don't. If you're using the mileage method you can just track your business journeys – and if you're a FreeAgent user, you can do that by adding in your mileage journey by journey.
Why would I not use the mileage method if I can? It sounds so much easier.
But remember that the mileage rate as given by HMRC is one-size-fits-all and some cars are much more expensive to run than others, so you might get more tax relief using the full-cost method if you drive a gas-guzzler.
You need to weigh up the extra time the full-cost method will take you to work out, against the extra money it could save you if your car is costly to run.
And remember you may have to use the full-cost method.
What about if I hire the car?
If you hire a car for a business journey only, you can claim the full cost of hiring the car.
If you hire a car for mixed travel, that's another issue entirely and it would come under the rules for travel which HMRC have published guidance about. (Jargon alert, this link goes to one of HMRC's inspector manuals.)
You can use the simpler mileage method if your business circumstances allow - but you have to stick to it until you change your car. Our mileage calculator can help you to calculate your expenses.
The full-cost method, which is compulsory for larger businesses, could save you money if your car is expensive to run, but is more complicated to work out.
To be absolutely sure which method will suit you and your business best, talk to your accountant.
Disclaimer: This article is for general guidance only and is no substitute for professional advice tailored to your own business.