Many contractors travel by car on business – they may be visiting client sites, or attending conferences and training sessions. However, when it comes to claiming tax relief for the costs of these journeys, the rules can be confusing.
In this article, Emily Coltman FCA, Chief Accountant to FreeAgent breaks down the different tax implications of using a company car versus your own vehicle for both sole traders and directors of limited companies.
Clearly, almost all contractors work via their own limited companies (or use an umbrella service), but as many freelancers work as sole traders, we’ve included both business types here for the sake of completeness.
1. Sole traders
If you’re a sole trader, there’s no concept of a “company car” for you, because there’s no legal difference between you and your business, so you will always own the vehicle. Sole traders can use one of these two methods to claim tax relief on business journeys in your own car.
If you have never claimed any capital allowances on that car, then you can use the simplified expenses method to work out the cost of your business journeys. I also call this the “mileage method”.
To use the mileage method, add up all your business mileage for the tax year (6th April – 5th April), and then apply HMRC’s rate per mile to that. For cars, HMRC’s rate is 45p per mile for the first 10,000 miles you travel on business in a tax year, then 25p a mile thereafter. This rate is intended to cover all the costs of buying, running and repairing the car.
Put the result into your accounts as one of your day-to-day running costs, so that it reduces your profit and so reduces the amount you pay tax on. This is how you claim tax relief on the cost of your business mileage.
Actual cost method
If you can’t use the simplified expenses method, or if you think that your car costs more than 45p a mile to run, you would use what I call the “actual cost method” to work out the amount you can claim as a running cost in your accounts.
To use the actual cost method, add up all your mileage, business and private, and then work out the business mileage as a percentage of the total mileage. For example, you may find that 20% of your car journeys are business journeys, so 20% is the business proportion of the car’s use.
Then, apply the business proportion to all the running costs of the car, such as fuel, repairs, MOT, insurance, servicing and so forth. For example, if your fuel bills total £1,000, then the business proportion of your fuel would be £1,000 * 20%, or £200. Do this for each running cost – these are the amounts you can include in your business’s accounts as day-to-day running costs for the car.
If you’re using the actual cost method you can also claim capital allowances on the business proportion of the cost of the car.
2. Limited company directors
If your business is a limited company, it’s a separate legal entity from you, so you will need to work out who should own the car – you or the company. You should discuss this carefully with your accountant, as one course of action may cost you more in tax, depending on the size of the car and your other business circumstances.
If you own the car
If the car belongs to you personally, you’d use the mileage method as described above for sole traders to work out how much you can claim tax relief on. You then submit this to the company as an expense claim, because the cost of running the car is a cost you’ve incurred personally while on the company’s business.
The company would put the cost through its accounts as a day-to-day running cost. It can also pay you this amount back free of tax because it’s reimbursing you for a cost you’ve personally incurred while working for the company.
If the company owns the car
On the other hand, if the car belongs to the company, then the company would normally pay for all the running costs of the car, and it would put those through its accounts as day-to-day running costs. These costs will reduce the company’s profit and therefore its corporation tax bill. It could also claim capital allowances on the cost of buying the car.
Keep in mind, however, that unless the company forbids you to use the car privately, then you will have extra tax to pay in respect of the taxable benefit of having a car provided to you. You may be surprised about what counts as a private journey – in most cases, HMRC considers driving from home to work as a private journey. It’s worth checking with an accountant on this point!
This is considered a taxable benefit because if the company had paid you extra money to help you to buy your own car, that money would have been taxable as earnings. Therefore, if it provides you with the car instead, that is subject to additional income tax as well. The company will also have to pay Employers’ National Insurance on the cost of providing you with the car, just as it would have had to pay National Insurance if it gave you extra money to buy the car with.
It’s worth talking through your options with an accountant to help you decide which method you should use to work out your running cost. This is especially important if your business is a limited company so you can decide whether you or the company should own the car. An accountant can help you choose an option that fits your own individual circumstances best, so you don’t end up paying extra tax.
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