Sole Trader Self Employed Motor Expenses

If you are a sole trader / freelancer and use a car or van for your work you have two different methods of claiming mileage / travel costs. What you must remember is that once you have chosen which method to use you must stick with that method for the life of that vehicle.

Method 1 – Mileage rates

This is the simplest method but it may not be the most tax efficient. You simply keep a mileage log of all allowable work journeys – you can get a free Excel mileage log from us, just send us an email.

At the end of the year you simply take the total number of miles and multiply by the current HMRC rates which are currently 45 pence per mile for the first 10,000 miles and 25 pence per mile thereafter.

FreeAgent is also great at managing your mileage as it lets you enter the business journey in and will work out the mileage claim for you.

Please note that you can only use the mileage rate method if at the point the car is first used for the business your business is below the VAT threshold rate. This is currently £83,000 (see here). If you are above this rate you would have to use method 2, discussed below.

HMRC offer more detail in their manual here

Method 2 – Actual costs less private element deduction

This is more complicated but is usually more tax efficient. Using this method you keep a tally of all motor expenses which will include road tax, insurance, fuel, repairs and maintenance and breakdown cover. Also if you have bought your vehicle on a lease you can include the interest costs. Warranty costs can also be included but must be spread over the life of the warranty which may for example be three years. The purchase cost of the vehicle is a capital item so is dealt with through a treatment called ‘Capital Allowances’. If you have bought a Van it will be eligible for the Annual Investment Allowance (AIA) so potentially the entire cost could be offset in the first year. Car’s however are not eligible for the AIA. The rate at which you claim the allowances varies depending on when it was purchased and the emissions rate, you can see the rates here. Remember when you sell the vehicle the value it is sold for must be taken into account as well so you could end up with a balancing charge or balancing allowance.

The key element when using this method of calculation is working out the percentage of your vehicle that should be disallowed because of private use. In theory you should keep a detailed mileage log of all work journeys and note the mileage at the beginning and end of the financial year. This will allow you to work out the exact personal element. However this is not always feasible. It is acceptable to keep a mileage log for a ‘snap shot’ period of, say, three months and work out the private element from this. This area of judgement is one of the most looked at by HMRC so make sure you do not over claim and can justify your claim.

Remember these methods of claiming vehicle costs are only relevant for the self-employed, if you operate through a limited company the rules are very different.

Leave a Reply