Motor expenses for sole traders and partnerships
If you drive your own car to travel for business, you might be able to claim some of the costs to reduce the amount of tax you pay for your business. How you go about doing that is a bit complicated, so here’s a guide to help you work out what you can and can’t claim.
Note that different rules apply for directors and employees of limited companies. This article is just for sole traders and partners.
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 costs you can claim for differ depending on whether you own the car or have hired it.
Business vs. private use
When you own the car, you’re likely to use it for both business and private purposes. For example, you might use it mainly to travel to visit clients, but you might also use it for your weekly food shop.
HMRC is unlikely to accept that a vehicle is for business use only, unless it's something like a taxi or a van with your logo on the side. Even then, HMRC has the right to ask to see your mileage log to prove you use the vehicle exclusively for business purposes.
The ‘simplified expenses’ method
HMRC has a ‘simplified expenses’ method for different types of vehicles that enables you to add up your business mileage and apply the HMRC-approved rate. In order to use this method you have to:
- Avoid claiming 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 approved mileage rate. However, you can claim the business part of interest on a loan you've taken out to buy the vehicle.
- Keep using this method to work out your motor expenses until you sell that car and buy another one. You can't change from the ‘simplified expenses’ method to the ‘full-cost’ method (see below), or back again, unless you change vehicles. Our mileage calculator can help you calculate your costs using the ‘simplified expenses’ method.
How to record mileage using FreeAgent
In FreeAgent you can easily add a new mileage claim by inputting the relevant details from your business journey. If there is a journey you make regularly, you can set it up to recur automatically, saving you from having to enter the details every time you make the journey.
Find out more about recording expenses using FreeAgent
The ‘full-cost’ method
If you can’t use the ‘simplified expenses’ method then you’ll have to use the ‘full-cost’ method.
To do this, you’ll need to 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.
In order to work out the business proportion you need to keep a mileage log. 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 and end of the journey
- the distance travelled (to calculate this, subtract the start reading from the end reading)
- whether the journey was for business or private purposes
- if the journey was for business, what it was for
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.
For example, if you travelled 1,000 miles in October, of which 500 were for business and 500 were private, then 50% of the use of the car was for business. If in October you spent £60 on petrol, then £60 x 50% = £30, so that’s the amount you can claim as a motor expense.
How to record motor expenses for the ‘full-cost’ method in FreeAgent
Using the above example, if you're managing your expenses with FreeAgent, you'd split the payment of £60 into two transactions: £30 which you explain as Motor Expenses, for the business journeys, and £30 which you explain as Drawings, for the private mileage.
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 has published guidance about.
To be absolutely sure which method will suit you and your business best, talk to your accountant.
Disclaimer: The content included in this guide is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.