Eoin Holohan, an ACA qualified accountant and a director with North London Accountants and MJH Accountancy, explains the expenses you can claim for using your car when you are self-employed.
The simple answer to this question is that you can claim tax deduction for any business usage of your car. It comes back to HMRC’s favourite principle – that the expense must be ‘wholly and exclusively’ incurred for business purposes.
Without a limited company there are two ways of calculating allowable motor expenses:
Method 1: Mileage claims
In this instance, you would need to keep track of your work mileage, and then apply the HMRC approved rate. Currently, this is 45p per mile for the first 10,000 miles (per year) and 25p thereafter.
Method 2: Actual cost
This method requires a little bit more work as you will need to record all motor costs including repairs, insurance, MOT, petrol etc. Then, you will need to record business and personal mileage to calculate the proportion of motor expenses that are deductible. You are also able to claim capital allowances when using this method.
Which method is better?
The mileage method is easier to calculate as all you need to do is keep track of your business miles travelled. If you are applying the actual cost method, you will need to track your total business and personal mileage travelled as well as your total motoring costs.
Whilst it might be additional admin, savings from using the actual mileage method can be large especially if you buy a new car and use it a lot for business purposes.
One thing that is important to note is that once you begin using a certain method you must continue using that method for as long as you own that car. It is therefore recommended to calculate your deductible expenses using both methods in your first year to find out which method is most beneficial.
Can you still claim if you owned the car before turning self-employed?
You can certainly claim the 45p per mileage expense regardless of when you have purchased the car. You can use the actual cost method too, however calculating a value for capital allowances is more complicated if you have previously owned the car.
How can I prove the car was used for business purposes?
As you can claim for all business mileage you will need to keep a track of business and personal mileage. Firstly, note down mileage at the beginning and the end of the year to get your total mileage. The easiest way to track your business miles is to keep a diary of where you have been for business and then each month you can work out your business miles covered that month. If you are unlucky and HMRC investigate this then a complete work diary will provide useful support for your claim.
What if I lease a car?
In theory leasing a car should be easier as it is likely you would hire it solely for business purposes. If you rented a car and travelled to Manchester for business, it would be easy to argue that I was in Manchester from Monday till Wednesday picked a car up on Monday and dropped it back on Wednesday. In this case all lease, insurance and fuel costs would be deductible.
If you were also using the leased car for personal trips you would be expected to only claim for the business use of course.
The only problem with leasing a car is that is that it might be more expensive.