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EXPENSES •  4 OCTOBER 2022 • 6 MIN READ

What motor vehicle expenses can I claim for my business?

a lineup of cars on queueing

Here’s the deal. Everyone is trying to make the most of their ability to record their personal vehicle use as a business expense, and in response, HMRC is doing their best to minimise the eligible criteria.

When you’re a client of ours, you won’t have to worry too much – we make sure you always claim the right amount. But regardless, let’s explore how the system works.

  • Motor vehicles for sole traders and partnerships
  • Motor vehicles for companies
  • VAT, loans and leasing FAQs
  • Is it smarter to borrow money to purchase a vehicle, or lease instead?

Motor vehicles for sole traders and partnerships

If your vehicle is used solely for business purposes, all motor vehicle expenses (fuel, maintenance, servicing, insurance, MOTs, replacement tyres, and similar) can be claimed as expenses.

But business purposes doesn’t include school drop-offs, going to the supermarket, or even travelling between home and work. The only possible exception here is when your home also acts as your office.

When a sole trader or partnership chooses to use a business vehicle privately too, the costs need to be separated.

In order to claim vehicle expenses you will need to maintain a logbook. A logbook records all travel for both business and personal. It notes the distance, date and reason for each trip. This information can then be used to understand the proportion of use allocated to the business, and we can choose one of two methods:

  1. Flat rate expense - for the first 10,000 miles travelled, claim £0.45 per business mile for cars and vans. A lower rate of £0.25 per business mile gets applied to additional miles. Motorcycles and bicycles apply a lower rate of £0.24 and £0.20, respectively, regardless of the amount of miles travelled.
  2. Actual expenses - Apply the percentage of business travel to all vehicle expenses incurred. I.e if it’s 70% of the time, 70% of a MOT or a service can be claimed as a business expense

There are a number of options for recording your mileage in a log book. Driversnote have created a very handy template which you can download here, or you might want to consider a mileage tracker app such as this one.  

In order to claim motor vehicle expenses through either of the methods above it is important to keep a logbook. 

It is worth noting that if you claim capital allowances on the purchase price of the vehicle you will not be able obtain a tax deduction through the flat rate expense method. You will instead need to use the second method listed above. 

Motor vehicles for company structures (as opposed to sole traders)

The treatment of motor vehicle expenses in relation to companies will depend on whether you, as an individual, own the car, or whether the company owns the car. 

If you personally own the vehicle then you would need to make mileage claims to the company. 

You would need to keep a record of all the business miles you have travelled, for which the company can reimburse you at the following rates:

  • £0.45 for the first 10,000 business miles travelled.
  • £0.25 for any additional business miles. 
  • If a motorcycle or bicycle is used for work a lower rate of £0.24 and £0.20, respectively, applies.

This reimbursement would be tax-free for you, and would be a tax deductible expense for the company. 

Alternatively, if the company owned the vehicle then it could claim the full cost of MOTs, fuel, services and any other vehicle related costs. 

If the vehicle, owned by the company, was also used by you for personal use this would be an employee benefit and would result in a tax liability arising on both you and the company. 

The value of the benefit and the resulting tax liability would depend on a number of factors, including:

  • List price of the car
  • CO2  emissions of the car
  • Number of days during the year it was available to you for personal use

An additional taxable benefit arises if the company pays for the fuel used for personal use. 

These benefits would need to be reported on a P11D. 

VAT, loans and leasing FAQs

Can I claim VAT on the purchase of a vehicle for use in my business? 

Broadly speaking, the answer is NO, except in the following cases:

  • The business is the car - for example a taxi or driving instructor or
  • The car will be used for business purposes only, and is not available for private use. You must be able to prove to HMRC that it is not available for private use.

If you lease a car the rules are a little different and there is more scope for reclaiming the VAT. 

As with above, if the car is for business use only and there is no personal use of the car (and there is evidence to prove this to HMRC) then the full VAT on the lease costs can be reclaimed. 

If the car is for personal and business use you are able to claim 50% of the VAT. 

VAT can also be claimed on the fuel used for business use, VAT on private use fuel cannot be reclaimed. 

Make sure to provide us with the sale and purchase agreement and your financing arrangement. We’ll enter it into Xero and make sure the full purchase price is picked up in your next VAT return.

Are my loan repayments a business expense?

They aren’t. The payments are going towards reducing your loan balance. However, we can claim the interest on the loan for business purposes. We make this adjustment when we prepare your financial statements.

What happens when I sell a business vehicle?

  • If you’ve claimed VAT on the purchase price, you need to charge VAT on the sale price
  • If the sale is to yourself or a related party, you’ll need to know its market value (you’re not allowed to sell it to yourself for £1)
  • Tax must be paid on any profit from the sale (although since vehicles usually fall in value over time this doesn’t often apply)
  • Your asset needs to be removed from the fixed asset register. But it’s best you leave that to us
  • If the proceeds from the money don’t go through your Xero bank account, you just need to provide us with the sale price and we’ll take it from there
Charlotte

Got any questions about Beany?

Chat to one of our friendly team today to get clarity.

Is it smarter to borrow to purchase a vehicle, or lease instead?

It depends. 

If you borrow:

  • The vehicle belongs to you or the company, assuming you meet the loan conditions
  • VAT can only be reclaimed if the car is the business (ie taxi or driving instructor) or if the car is not available for personal use
  • It’s an asset, capital allowances will be available on the vehicle meaning that depending on the CO2 emissions you could get tax relief of up to 100% in the first year.  
  • The loan repayments are not deductible, but the interest portion is

When leasing a vehicle:

  • In nearly all cases, the vehicle doesn’t belong to you or the company.
  • It’s not a business asset, so we can’t claim capital allowances on it. 
  • VAT can be claimed on the full purchase price if entirely for business use, or 50% of the purchase price if available for personal use
  • The lease payments are fully tax deductible. 

Here’s when we often get the follow-up question: “What is my best option for tax purposes?”

That’s one we can’t answer. It’s more of a business decision and it depends on your cash-flow, available finance and personal preferences.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. 

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.  

Charlotte

Charlotte Wass

General Manager, Beany UK

Chartered Accountant and Chartered Tax Adviser based in London. I love autumn, otters and Malteasers, and I hate spiders, peanut butter and the London Underground.

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