Often an area of some confusion for my clients is the question of what to claim for car expenses. Should we be putting our petrol bills through the accounts, or is there another way of claiming these expenses?
The answer is that, as a sole trader, you have 2 choices, either to claim the business proportion of “capital allowances” and running costs or if your turnover is under the VAT threshold to claim 45p per mile (up to 10,000 miles, and then 25p, 2012/13 rates shown). Capital allowances are similar to depreciation charged in a set of accounts, in that they are designed to spread the cost of the asset over its useful life. Capital allowances on cars have changed recently and are now based on the emissions of your car. If you have bought, or are buying, a new car, you will receive 100% capital allowances for cars with less than 110g/km, 20% for cars with emissions between 110 and 160g/km and 10% for cars over 160g/km (these limits are changing with effect from 6th April 2013). So if you buy a car with over 160g/km, you can only offset 10% of its cost in year 1 (further reduced by personal use – see below), and in year 2 you will take a further proportion of the written down value of the car (i.e. of the 90% of the cost of the car). Different rules apply to leased cars.
Any capital allowances and share of running costs that you claim as expenses must be based on your actual business use of the car in the year, so you should keep a log of business journeys taken, with dates, destinations and mileage. You should also make a note of your personal mileage, so that at the end of the year you can work out the proportion of business use out of the total miles travelled. So if your business use worked out to be 50%, you would claim 50% of the capital allowances available, and 50% of all the running costs including servicing, petrol, etc,.
In many instances, it will be just as tax efficient, and simpler to calculate, to claim 45p per business mile travelled. However, what you claim will depend on your circumstances regarding business and personal use of your car, as well as how much you spend on it. It also depends on how long you expect to keep your car for and whether it is worth anything at the end. You should ask your accountant to look into the best claim for you.
If you are a limited company, you can either charge your company 45p per mile (up to 10,000 miles, and then 25p), or you can sell or transfer your car to the limited company and use it as a company car. Should you choose to have a company car, you will be receiving a taxable benefit from the company which will need to be recorded on your P11D. The company gets tax relief on all of the running costs with no adjustment for your private use.
The taxable benefit is based upon the CO2 emissions of the vehicle and the list price of the vehicle when new. Buying a car second hand therefore does not reduce the taxable benefit. The government has put the CO2 emissions into a table of percentages and the resulting percentage is applied to the list price of the car when it was new. CO2 emissions of under 74 grams per kilometre (g/km) results in 0%, 75 to 93 g/km results in 5% and 94 to 99 g/km results in 10% and 100 g/km results in 11%. Thereafter the emissions are grouped into bands of 5 with 1% increments. So 100 to 104 g/km gives 11%, 105 to 109 g/km gives 12%, all the way up to vehicles over 215 g/km, when the relevant percentage stops at 35%. Diesel cars have 3% added to the relevant percentage.
As an example a petrol car which cost £20,000 and produces 145 g/km (20%) will produce a taxable benefit of £4,000 (£20,000 X 20%). If you pay tax at 20% the tax will be £800 p.a. On the other hand, if you have a car costing £30,000 which produces 230 g/km (35%) the taxable benefit will be £10,500. Again if you pay tax at 20% the annual tax bill becomes £2,100. An identical diesel car produces relevant percentages of 23% and 35% respectively.
If the company also pays all of your fuel the same Co2 percentage is used but against a standard fuel multiplier of £20,200 for all vehicles. Using the same car examples as above the £20,000 car produces a taxable benefit of £4,040 and the £35,000 car a taxable benefit of £7,070. Tax at 20% for fuel is £808 and £1,414 respectively irrespective of the fuel being petrol or diesel.
The alternative to taking fuel as a taxable benefit for a company car is to charge the company the advisory fuel rate for business miles travelled. These range for 15p per mile for petrol cars up to 1,400cc, 18p for cars from 1,401 to 2,000cc and 26p for over 2,000cc to 13p for diesel cars up to 1,600cc, 15p between 1,601 and 2,000cc and 19p over 2,000cc.
How do you account for your car expenses? Do you think the 45p per mile works out to be quite generous or not enough?
It is worth noting that almost every year the rates shown above change so it is a good idea to ensure you keep up to date with the relevant rates.
Until next time,
Simon