With most types of business, you will need transportation for business-related journeys such as visiting customers or going to networking events. Some businesses may purchase a van to do this, but sometimes it is much more affordable to just use your own car.
Luckily if you use your own car you can still claim expenses to help reduce business profits and therefore reduce your tax bill. There are two ways to do this.
Treating your car as a business asset
This method is available to sole traders. You keep records of all your expenses such as fuel, motor insurance and repairs, then include them as expenses just like any other purchases or services your business pays for.
However if you still use the car for private use as well you cannot claim all of your expenses. Instead you decide a reasonable percentage for business and private use, for example if you use your car roughly the same amount for both business and private use you would say 50% of your expenses are for business.
The result is that even though you record all of your motor expenses, you would then multiply the total amount by 50% (or divide by two) and use this figure on your accounts and tax return. The same goes for any capital allowances you can claim on your car, you work out the amount of capital allowance for the year, then multiply by your business usage (in this case 50%) and use that figure.
Please be aware that the capital allowances can be affected by the CO2 emissions of your car. Higher emissions will mean you cannot claim as much of a capital allowance per year. If a car has emissions of 75g/km and is a new unused car you can claim 100% FYA allowance. For emissions between 75g/km and 130g/km you can use the main rate allowance of 18% per year. If the emissions are over 130g/km then you would use the special rate allowance of 8% per year. You cannot claim AIA on cars.
You cannot do this with a limited company as the company counts as a separate entity with its own assets. The company can own a car that you use for business, but this results in some extra rules that will be covered in a future blog.
This method can be used by both sole traders and limited companies. You record the number of business miles you travel throughout the year.
Journeys from home to your usual place of work do not count for this as where you live and work are regarded as choices you make, as opposed to where you have to go for work. You can record the miles for other journeys such as travelling to a customer or supplier.
Once you have your number of miles for the year you multiply them by the current allowance which at the moment is 45 pence for the first 10,000 miles and 25 pence for every mile after. The total figure calculated by this method is what you would use on your tax return and accounts.
If you use the mileage allowance, you cannot claim any other expenses for the car, not even capital allowances.
You can choose which method to use, allowing you to see which one reduces your tax the most. Be aware though that once you have made your choice you will be unable to switch between the two methods until you change your car.
If you would like assistance or advice regarding the above, or general help with completion of your accounts or tax returns, please do not hesitate to contact us.