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:
- 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.
- 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%
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.
*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.