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Business motor expenses can be complicated and with rising fuel costs you want to make sure you’re making the right choice for your business. So, let’s take a trip through your options.
How you put your motor expenses through your business can depend on whether you’re a sole trader or limited company, if you have employees, whether you’re VAT registered, the type of vehicle and the nature of your journeys.
Whatever method you choose, you always have to start with the journey. You can only claim motor expenses for business travel; not for personal travel or commuting.
There are two main routes to claiming motor expenses, mileage or full cost.
This method uses a fixed rate per business mile so relies on keeping accurate mileage records.
The mileage rate is supposed to cover not just fuel, but all the costs involved with running a vehicle. It’s also supposed to account for an element of wear and tear that would reduce the value of the vehicle. If you’re using mileage, then no other motor costs can be included as business expenses for that vehicle.
With this method, you can claim journeys in different vehicles, for example if you have two family cars. The most important thing is that it’s a business journey.
For employees and directors of limited companies, any personal mileage reimbursed by the company is classed as a benefit in kind and is taxable. Similarly, if the mileage is reimbursed at more than HMRC’s approved rate, the difference becomes a benefit in kind.
How about if an employee is using a vehicle owned by the business but paying for the fuel personally? They still need to track their business mileage so that they can be reimbursed for their fuel costs.
They can claim the business mileage at the HMRC advisory fuel rate, which covers the fuel costs only (and not any of the other motor costs covered in the approved mileage rates).
Conversely, if the business pays for the fuel and the employee doesn’t want to end up with a benefit in kind, they can reimburse the company for their personal mileage, again at the HMRC advisory fuel rate.
This uses the actual costs of fuel and running the vehicle based on the expense bills and receipts.
If the vehicle is owned by the business, then it’s more common to use the full cost method. However, if there is any element of personal use this has to be taken into account.
For sole traders this would mean discounting a portion of the motor costs in relation to the personal use. The most accurate way to work this out is to log business mileage so that you can see what portion of the overall mileage relates to business. This can then be applied to the motor costs. Or if it’s mainly business use, then log personal mileage.
For limited companies this would mean looking at Benefits in Kind for the employees who are using the vehicle. Any personal use whatsoever in a vehicle owned by a limited company can potentially cause a benefit in kind. There are particularly strict rules around company cars, but company vans can incur benefits in kind as well.
There are some extra considerations for motor expenses if your business is VAT registered.
If you’re using the mileage method, then you have an additional calculation to do for VAT. Also, don’t throw away those fuel receipts!
VAT can only be claimed on the fuel element of the mileage allowance. HMRC provides an advisory fuel rate to apply to your mileage allowance; this depends on your particular vehicle and is updated quarterly.
You also need to ensure that you have VAT receipts covering enough fuel for the amount of VAT that you are claiming on the fuel element of your mileage.
Whatever method you are using, you also have to make sure VAT is not being claimed on any element of personal use.
This is easy enough if you’re using mileage, as only business miles are being claimed. It’s a bit harder if you’re using the actual cost and there are two options.
HMRC have scale charges – these are fixed rates, based on the CO2 emissions, that show how much should be deducted from the VAT. The amounts are given for a month, quarter or year depending on the VAT period.
Alternatively, if you have accurate mileage records, you can work out the actual percentage of personal use mileage and then deduct that element, with the associated VAT from your fuel costs.
There are also some VAT differences in what can be claimed for the cost of the vehicle depending on whether it is a car or a van and whether it is new or second hand. For example, you can’t normally claim VAT on the purchase of a car. This will be covered in more detail in a future post.
You can switch from mileage method to full costs and vice versa, but only when you change your vehicle. Once you’ve decided on a scheme for a particular vehicle, you should stick with it until you replace the vehicle.
Despite the rising price of fuel, the mileage rate remains at 45p per mile. The advisory fuel rate is adjusted quarterly in line with fuel prices, but the approved mileage rate has remained at 45p since 2011. This means that as fuel prices go up, you’re effectively being compensated at a lower rate for the other motor cost elements.
It is definitely something to consider if you’re replacing your vehicle or bringing a new vehicle into the business.
If you have a new or low maintenance vehicle with good fuel consumption, this may not be an issue. However, if you have a vehicle with a high portion of business use (or wholly business use), that’s expensive to run in terms of fuel and other motor costs, then using the actual costs may be better value.
The method you choose will largely depend on whether you’re using your own vehicle and the proportion of business miles and personal use.
If you have any element of personal use then logging business mileage is important, even if you are using the full cost method, so that you can make sure all your expenses are business-only.
If you’re thinking about a new or replacement vehicle then it’s always good to discuss the possibilities with your accountant, particularly if you’re VAT registered. Every business is different, and you need to find the best option for your particular circumstances. If you’d like to chat to us about this, then just send an email to tax@cooperfaure.co.uk.
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