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.

 

 

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.