How to calculate vehicle expenses for tax returns

Before we look at how to calculate vehicle expenses for tax returns, lets just cover some general background accounting information. Almost all pet care businesses set up as either sole traders or partnerships. Sole trader doesn’t mean that you work alone; a sole trader can employ or contract staff. The term simply refers to some one who runs their own business as an individual who is the sole owner. Partnerships refer to businesses where there are two or more owners, who haven’t set up a limited company. Sole traders and partnerships that have a turnover of less £83,000 can use cash basis accounting, which simply records cash coming in when it arrives and cash going out when it is spent. Below this threshold they also don’t have to register for VAT. All of this simplifies your accounting process.

How to calculate vehicle expenses

HMRC gives two option for submitting your business related vehicle costs against tax:

  1. The first is as an expense per mile. You can record your business miles and then claim 45p per mile for the first 10,000 miles and 25p per mile over that.
  2. The second is as a proportion of your total vehicle costs. You can record your business miles and your domestic miles and work out the percentage of vehicle use that is that is for business.

In the first instance (called simplified expenses), you need to record all business mileage (BM), and then just calculate the expense. For example:

If you do 8,540 BM in a tax year, you can claim expenses of 8,540 x 45 (pence). This calculation equals 384,300, and since that is pence, we divide it by 100 to get pounds. This means that you can claim £3,843 against tax for your vehicle usage.

You cannot use simplified expenses, if you have already claimed for your car as a capital allowance.* More on this later.

Also, once you start using this option (simplified expenses) for any vehicle, you can’t change back to the percentage of actual costs option for the lifetime of that vehicle.

When you start off, it’s worth working out your expenses using both models and seeing which is likely to give you the best offset against tax.

In the second instance (actual costs), you need to record BM and domestic mileage (DM), and then work out what percentage of usage is for business. Obviously, if you have a van that you only use for work, it’s 100% BM, but for many of us it’s a proportion. My car use is around 80% BM. Once you have BM and DM data for the year, you can work out roughly what percentage of miles is business use.

You can do this by adding the two figures together, which gives you 100% of your annual mileage. Divide this number by 100 to get 1% and then divide your BM total by the value that calculated as 1%. The result is the percentage that you use your car for business purposes.

As an example if you do 9,400 BM and 4,500 DM annually your total annual mileage will be 13,900. This is 100% of your annual mileage. Divide this by 100 to get 1% of your annual mileage – 139 in this example.

Then divide your annual BM (9,400) by the value of 1% (139) to give you your percentage business use. In this example:

9,400 ÷139 = 67.6%

how to calculate vehicle expenses

You are allowed to claim the calculated percentage of all of your car related bills (tax, insurance, repairs, service, MOT, tyres and, of course, fuel) against tax, when it is time to submit your tax return. Just keep records and receipts for all of these expenses and at the end of the tax year add them together to get the total amount that your vehicle has cost to run. In the example, you can claim 67.6% of total vehicle expenditure against tax.

“Against tax” just means that when you work out the profit (income minus expenses) your business makes, you can deduct this amount from the profit as an expense, before you start to pay tax on your profits.

Capital allowance

*A capital allowance item, is a essentially a large expenditure item that will benefit your business for a number of years. If you use the cash basis accounting system – recording real time income and expenditure – the only capital allowance item you can claim against tax is your vehicle.

If you also use the percentage of actual costs method of calculating vehicle expense you can claim against the cost of purchasing your car as a capital allowance. This means that you can also deduct a percentage of the vehicle value from your profits before paying tax.

To complicate things further, this percentage is variable and depends on the CO2 emissions for the vehicle. Use the HMRC table to determine this. The rates are ether 18% or 8% of the value (purchase cost). But these percentages then need to be adjusted if you don’t use the vehicle solely for business use. So using the example above, you would work out 18 (or 8) percent of the value and then work out 67.6% of that figure.

So, if the vehicle value was £10,000 and – based on the HMRC table – you could claim at a rate of 18%, then if you used the vehicle for business only (100%) you would claim for (10,000 ÷ 100) x 18, which is 100 x 18 =1,800. However, if you were only using the vehicle 67.6% for business, you would then need to work out 67.6% of 1,800.

1% = 1,800÷100 = 18       then multiply this by 67.7 = £1,216.80.

If you already had your vehicle before starting your business and are using it for business purposes, you will need to use the list price for your vehicle at the time of starting your business, to determine its value for these calculations.

Remember you can’t claim this capital allowance if you use the simplified expenses method of 45p per mile up to 10,000 miles and 25p per mile thereafter.

First year trading adjustments

There’s a final complication, in that when you first start trading, your initial self assessment tax form won’t be for a full year. This means that any allowances against tax must be further reduced to relate only to the part of the year that you have worked. You can do this through complex calculations, but actually, each week is almost exactly 2% of the year. So long as you always round up to the nearest full week your calculations will be accurate. So if, for example, you have worked for 18 weeks and 4 days of a tax year, round this up to 19 weeks and multiply by 2. So 19 weeks equates to 38% of the tax year. You then need to reduce the allowances above down to 38% of the total already reached.

 

 

Pet sitting business accounts

Unless you are an arithmophile (lover of numbers), contemplating your pet sitting business accounts probably sends you into a mild anxiety state! The idea of submitting a self assessment tax return is enough to send most of us into a cold sweat. By my third self assessment (£600 of accountant fees later) I decided to go it alone, and I can genuinely say that it was fairly easy. For a sole trader business – providing some kind of pet care service – doing your own accounts from beginning to end, is well within your grasp.

Okay, lets clarify… maintaining your records – often called “your accounts” – is really book keeping. You definitely need to get to grips with that side of your business, so that you feel in control of your financial well-being. Generally a small business would only employ an accountant to look over the accounts at the financial year end, and submit a tax return based on the records given to them. For the average person, it’s an area shrouded in mystery and the fear of ‘getting it wrong’ can paralyze.

Hang on a second! You are a setting up your own business; a fact which immediately catapults you into the capable, motivated human being category. You can do this. Accounting isn’t any different from any other area of running a business – you just need to be well informed and equipped to feel enabled.

“Handy hint: invest in a large button desk calculator for greater accuracy.”

The benefits of presenting your own pet sitting business accounts include:

  • You’ll have a deeper understanding of your financial situation, which breeds confidence and will enable you to make good financial decisions.
  • You are immediately about £350 a year better off, though if you have a complex business your accountant will almost certainly pay for himself in tax relief, because he understands better than you the detail of what you can claim.
  • Your intimate knowledge of your accounts will help you spot issues quickly.
  • You will feel in control of your own tax and NICs because the process will no longer seem mysterious.
  • You’ll learn a new (really useful) life skill.

Understanding what you’ll need to do at self assessment

In order to easily present your pet sitting business accounts to HMRC, it will help to understand what information you will be asked to provide. The self assessment tax return is essentially a record of your total business income minus your business expenses, which equates to the profit your business has generated in a single year. The tax year starts on April 6th (so ends on April 5th), with hard copy returns submitted by midnight on October 31st following the end of the tax year. Online submissions (which I can recommend) can be submitted up to Jan 31st following the end of the tax year. it does take at least 10 days to register for online self assessment, because they send you an activation code by post. So don’t leave it until January 30th to do this!

As well as income and expenditure,you will be asked to declare any other areas of personal finance, such as, other employment, interest from UK banks, rent from property, pension, state benefits, student loan and charitable giving (gift aid). If you are married or in civil partnership and have a low income in the first year of trading, you can also transfer some of your personal allowance to your partner, so that they pay less tax.

When completing the self assessment select ‘cash basis’, when asked, as pet sitting businesses (especially those that offer boarding) are based on invoices which might not be due for payment until long periods of time have elapsed. The cash basis system means that you only consider money actually received and expenses actually spent during the tax period in question.

Recording your total income is easy. Every time we make a booking we invoice the client for the service. The client pays the invoice and the service goes ahead. This is our income. So the sum total of all your paid invoices, will be the total income for the year – unless you are also selling products of some kind, in which case, all money generated from sales would be added to your business income.

Recording your expenses accurately, relies upon understanding what qualifies as an expense and how you can claim tax relief on those expenses. This is where it helps to look at how the self assessment is categorised.

Categories for tax relief on the self assessment tax return

  1. Accounting, legal and professional. Accounting costs and legal fees (though not if you have broken the law).
  2. Advertising, business entertainment costs, free samples (not entertaining clients). Not on short form, in which case include in “Other” category.
  3. Bank, credit card and financial charges. Overdraft fees, credit card charges (not repayments), loan interest and hp interest (not repayments).
  4. Car or van expenses. Worked out on either a flat rate or a % of total use based on number of business miles to number of personal miles ratio. Also parking and tunnel tolls.
  5. Communications, stationery and office (includes mobile, internet etc., with % of total use based on business usage to personal usage ratio).
  6. Cost of goods to (sell or) use in providing a service.
  7. Rent, rates, power and insurance
  8. Other – journals, trade bodies, education (and 2 above).
  9. Repairs and renewal of property and equipment.
  10. Wages, salaries, staff costs including bonuses.*

*This DOES NOT include any money that you pay yourself, use to buy personal possessions, or draw from the business.

Making these categories specific to pet sitting business accounts

It makes sense for you to use these categories from the beginning in your pet sitting business accounts to record your expenses. If you are doing this manually, then I would recommend this pre-prepared small business accounts book. It is designed for small businesses who invoice their clients, and will allow you to record income and expenditure under the same basic categories as HMRC.

The Best Small Business Accounts Book (Blue Version): For a non-VAT Registered Small Business [Author: Peter Hingston]

If you intend to use software, you can purchase accounting software, such as QuickBooks. You would need their Simple Start package to allow you to generate e-invoices for your clients. However, I would recommend a more pet-specific software package, like Pet Sitter Plus. From around £15 per month, you can get software that will cover all of your pet business needs, not just the accountancy. Using this kind of software will allow you to become extremely efficient, reliable and professional in terms of your presentation of the business to clients; something which they value highly. It will also link all of your business admin and accounting needs together, eliminating the need to duplicate information when setting up client areas. All of this will save you large chunks of time, and since you are essentially selling your time in the pet service industry; time is money.

Looking at the categories above, lets link them to specific details that are relevant to pet sitting business accounts. The numbered list below relates to the numbered categories above and explains what you would include in each section.

  1. This would be accounting fees if you pay an accountant, plus any legal fees generated in the course of running your business (but not if you break the law). If you do your own self assessment (SA) this will most likely be £0
  2. This category isn’t on all SA forms, in which case include it in “Other”. It refers to the costs of promoting your business such as Google Adwords, your website (hosting, domain and any design or software costs), flyers and free samples (such as, something you might give away to interested parties at a dog fun day).
  3. This category is self explanatory. If you open a business bank account then there is usually a charge. You may also pay interest on a start up loan or credit card. You can claim tax relief on both interest and bank charges.
  4. There are two ways of working out car/van expenses and you need to choose one. The easiest is the flat rate, which is worked out on business miles. You record your actual business miles and then claim 45p per mile. Alternatively you can claim a percentage of your total costs. Car costs include tax, insurance, break down, petrol, MOT, servicing and repairs. If you choose this route then you don’t need to monitor mileage continually, but you will need to regularly check on the proportion of business to social usage. When you begin your business, your mileage will be a lower proportion, maybe 20% business, 80% social. Obviously this also depends on how much you use your car for other things. As you get busier – especially if you don’t use your car much, other than for the business – you might find the reverse is true: 80% business and 20% social. You can work these percentages out by monitoring your miles over an average month, but remember to keep revising this from time to time, as your business grows. When filing a return based on the actual costs, you would add up all your vehicle costs, work out your average percentage business use for the period and claim that percentage of the actual costs against tax. You can also include the full amount for tunnel tolls, public transport costs and parking charges incurred in the fulfillment of your business. NB. If you start out using the flat rate (or change to the flat rate) for any vehicle, you have to continue using the flat rate until you change that vehicle.
  5. Here we include the cost of all stationary, postage, office equipment (such as a printer), printer ink, plus a percentage of internet and phone packages. With any mobile, house phone, computer, broadband and similar, where usage is divided between personal and business use, you must make a percentage usage decision. So if you buy a mobile contract and you use your phone roughly 50/50 for personal and  business, then you would claim half the cost of the contract. If you have a separate business phone then, of course, all costs can be claimed for that.
  6. Goods used for services would include your dog care equipment, treats, poo bags, leads and the like. Also equipment that is necessary to allow you provide the service such as walking boots, outdoor coat, high visibility jacket, stair gate, dog grill or seat belt harnesses for the car, crates and similar. If the life expectancy of the item is under 2 years, it goes here. Longer lasting equipment would be claimed in category 9.
  7. With in-home costs, we are back to working out a percentage usage. For instance, if you have 5 rooms in your house and you use two of them for 24 hour dog care, seven days a week, you would claim 2 fifths (40%) of your council tax, heating, lighting, water costs. You can also claim cleaning equipment and laundry costs. If you only took dogs for weekday day care then you would divide this again proportionately. Divide the 40% by 7 to get the amount per 24 hours and again by 3 to get the amount per 8 hours. Then multiply by 5, to get the total for 5 days. It sounds complicated but you only need to work it out once. If you generally work from home for only a few hours each week – just doing admin for a dog walking business, or the odd dog sit – then the easy option is to go for the flat rate for working at home. If you work 25 to 50 hours per month, this is £10 (per month), 51 to 100 is £18 and 101 and above is £26. if you are doing 24 hour boarding for most of the month, your hours would be around 400 per month, so you would be much better off claiming for the pro rata actual costs. Insurance in this category would be your business insurance, not house insurance which, almost certainly, won’t cover anything related to your business eg. damage to property and furniture.
  8. “Other” simply means anything else. This might include training, professional memberships, journals or books. On the short self assessment form (which you will use unless you have a large and complicated business model or a limited company) you’ll have to put advertising costs here as category 2 doesn’t exist separately.
  9. Repairs and renewal of property and equipment. This refers to business premises and equipment owned by the business, and would mainly be appropriate for companies with separate premises (like the bigger day care facilities). Most of your equipment will be small items with a short life expectancy, when in full use within your business. As such it would come under category 6. While it’s hard to get home insurance that will cover repairs to property that are due to pet business usage, you can still list these expenses (which the business will have to pay for) against tax.
  10. A large section of expense for anyone who doesn’t work alone is paying contractors or employees. Contractors invoice you, then you pay the invoice  – so this section is just the total of those invoices for the tax period. Employees are registered (by you) into the PAYE scheme and this generates totals paid out for wages, NICs and sick pay. If you don’t have co-workers this section will be zero. It does not include anything you pay yourself – that is called drawings and is part of the business profit.

Casio MX8 Desk Top Calculator

I realise that this article on pet sitting business accounts, will raise many questions, and some areas that I will be posting about soon include:

  • Do I need a separate bank account?
  • Do I need a business phone?
  • Why contractors suit the pet care service industry.
  • Using PAYE for your employees.

If you have any questions please feel free to comment below and I will answer you as soon as I am able.

 

How to set up a small business

When considering how to set up a small business, there are a number of requirements that – from a legal point of view – must be met. Firstly you will need to decide on your trading name and your business structure. From the point of view of your prospective clients, advertising and marketing materials you will probably want to give your new business a name. However, it is perfectly possible to register as self employed in your own name and trade for yourself or contract your services to other businesses.

Your business structure can be:

  • sole trader (a business run by an individual)
  • partnership (a business with shared ownership and responsibility)
  • limited company (a company with shareholders and directors).

Assuming you have decided to give your business a name, there are a few points to consider. The name must be unique and different enough from other similar businesses and trademarks, so as not to be confusing. There are rules to be followed on this and it is important to be sure that you search for your chosen name, both online and at Companies House. Many pet sitting businesses are sole traders, working alone or with contractors, and sole traders do not need to register with companies house.  It’s still in your interests not to choose a name too similar to either a large national company, like Barking Mad, or other local companies in your area. Remember, if prospective clients can easily confuse you with someone else, you may stand or fall on their reputation, which is a powerless position to put yourself in. You also can’t use terms like Ltd, PLC etc. There are a number of other considerations when choosing a name for your business – a process which is it wise not to hurry – and you can find a wider discussion here.

As a sole trader you can use a business name to trade and on headed paper, invoices and such like, but you also need to include your own name on such documents.

How to set up a small business – registering with HMRC

The next step when considering how to set up a small business is to register the business with HMRC. This is actually a relatively straight forward procedure and the HMRC website will walk you through the steps needed. You need to register as a sole trader (unless you have decided to enter a business partnership with another person). To clarify, being a sole trader simply means that it is only you who owns and is responsible for the business. It doesn’t mean you can’t have co-workers or employees. You need to register by October 5th in your second tax year. For example, if you begin trading during the tax year 6th April 2015 to 5th April 2016, then the latest you can register and be certain of no penalties is October 5th 2016. However, it is best to register as soon as possible so that you are prepared for the process of submitting your first tax return.

If you’ve completed a self assessment tax return in the past, you will still need to register your new business, but you’ll need to use the same self assessment account and the same unique 10 digit taxpayer reference number (UTR), as this enables HMRC to link all your interests together.

How to set up a small business – accounting

As a sole trader you are responsible for keeping accurate, complete and readable business records and accounts. Your income for the first few years will almost certainly be under the threshold for cash basis accounting, and this style of accounting works well for a pet service business. In essence this means that you only record actual cash flow in and out of your business. So while you might invoice for a dog board a few months ahead of the payment becoming due, you would only add the income to your accounts when the payment is actually made. This keeps everything very simple in a system where many of your invoices can remain unpaid for months. The threshold for maintaining cash basis accounts is £83,000 turnover per annum.

Whatever income and expenses you add to your accounts you need to be able to prove. With this in mind you are responsible for keeping all invoices, bank statements, cheque book stubs and expense receipts for at least 5 years from the self assessment submission deadline for that tax year. You’ll need a system for keeping records in some semblance of order. Once again, I recommend Pet Sitter plus software because it does everything for you in terms of record keeping, other than store the hard copy receipts and contractor invoices (if you contract services out). An A4 document file with sections can be good for this:


A4 Expanding 13 Part Expanding File Folder Stud Wallet Case Tabbed Organiser

or a small, 2-drawer filing cabinet when you outgrow this:


Bisley 660x400x400mm A4 Steel Filing Cabinet – Black

If you don’t want to use a software package for all of your client information, bookings, invoicing, accounting and receipts, then I would recommend this pre-prepared small business accounts book. It will record income and expenditure, but you’ll have to have other manual systems for recording client information, bookings, invoicing and receipts of payment.

The Best Small Business Accounts Book (Blue Version): For a non-VAT Registered Small Business [Author: Peter Hingston]

How to set up a small business – NICs, tax and VAT

When you first register your business you will also register for Class 2 NICs. These are paid once you make a profit of more than £5,965 per annum, at a rate of £2.70 per week in two 6 monthly installments by direct debit.

Once your yearly profit exceeds £8,060, you will also pay 9% of all profits over this amount as Class 4 NICs. This is part of your yearly self assessment procedure and any amount due will be generated automatically when you make your submission. If your profit is over £43,00 you will only pay 2% on anything above this threshold.

The threshold for tax is £11,000 for a single person, and any profit over that is taxed at 20%. For tax purposes, you are the business and the business is you, so you’ll be taxed on the profit, regardless of whether or not you have paid yourself any income. You should also note that if you have other sources of income these will also be part of your self assessment and will count towards reaching your tax threshold.

Your business won’t need to be registered for VAT until the turnover exceeds £83,000.

I’ll go on to discuss the detail of financial record keeping and tax relief for self assessment in another post.