There are all sorts of reasons why you’d need a car or work vehicle if you’re self-employed. From tradespeople to healthcare workers, builders to children’s entertainers, thousands of people need their own transport to carry out their jobs.

But did you know, you can actually claim some of the running costs and other vehicle expenses against your tax bill? This includes electric and hybrid vehicles. Let’s take a look.

I’m self-employed and need a vehicle for work. What are my options?

So, you’ve decided you need a work vehicle. Depending on a few factors (not least budget), there are several options, including:

• Using your own vehicle in your business
• Leasing a vehicle
• Hiring a vehicle each time you need one
• Owning a vehicle as a limited company

The rules around each of these can vary depending on your business structure, so we’ll go through them in more detail.

Personal use versus business use

This question comes up a lot, so we thought it would be worth explaining the terminology. Business use describes any journey you make in your vehicle which relates wholly and exclusively to your business.

 
Some vehicles have ‘dual usage’ where you sometimes drive the car or van for personal journeys as well as for business reasons. You can only claim the part of your expenses which relate to the business, so you’ll need to separate these. Unfortunately, if you can’t distinguish between the business and private element, you won’t be able to claim any of the expense.

 
For example, if you drive from your home to the office or workshop you normally operate from, it’s not classed as a journey which you can claim.

Claiming expenses if you use your own vehicle in your business

You can use your personal vehicle for business purposes and claim tax relief on the cost of doing so. There are two methods of working out your vehicle expenses under this method, although the structure of your business might restrict which option you can use.

Sole traders and individual partners in a business partnership can claim expenses with either method:

• Calculate the actual cost of using your car or van for work trips
• Claim a flat rate for each mile you travel (also known as simplified expenses)

Claiming actual costs

Your ‘actual expenses’ are what it costs you personally each time you use your own vehicle for business purposes, such as paying for fuel, insurance, maintenance, and repairs. This method can be useful if your vehicle is particularly expensive to run, or if claiming a flat rate per mile would leave you out of pocket.

It does require a fair amount of extra admin though. You’ll need to log the details of every expense relating to your vehicle, such as invoices and receipts, as well as keeping a record of each business trip.

The amount you can claim is worked out based on the total amount of business miles you travel as a proportion of your total mileage. For example, if 40% of the miles you travel in a year relate to business, you can claim 40% of your total costs.

Can be claimed by

• Limited companies
• Sole traders
• Partners in a partnership

Claiming flat rate expenses

The other option is to claim a flat rate for each business mile you travel using your vehicle. This method is easier to work out, although it’s useful to check if this covers the true cost – especially if it’s expensive to run! The rate you can claim per mile is shown in the table below.

Can be claimed by

• Sole traders
• Partners in a partnership

It’s a bit different for limited companies because you can’t claim tax relief on a Company Tax Return using simplified expenses. If you use your own vehicle for a business trip, your company will reimburse your expenses, and then claim tax relief on this. The payment you receive from your company will be worked out using HMRC’s flat rate per each mile of travel.
 

Leasing a vehicle for business

You can lease a vehicle specifically for your business, either personally or through your own limited company. Leasing a car or other vehicle does have its advantages, because you’ll only pay for the period that you use it, rather than the whole vehicle. Making monthly payments can also help you manage your cash flow, rather than making a larger up-front payment.

The downside is that you don’t actually own the asset, so you can’t sell it on if you need to, or claim capital allowances (which we’ll get to in the section about buying a vehicle!).

Leasing a car if you operate as a sole trader or partner

Sole traders can lease a vehicle for business use, but if you also drive it for personal (non-business) journeys, then you’ll need to work out the proportion of use. For example, if 40% of your mileage relates to business use, you can claim 40% of the costs.

The next bit of working out your claim relates to vehicle’s emissions. According to HMRC “if you leased a car on or after 6 April 2020 and the CO2 emissions are more than 110g/km, you must disallow 15% of the hire charge or rental cost.” Basically, your claim is based on emissions, so electric and hybrid vehicles could work out to be more cost efficient!

Work out your claim as if all of the mileage was for the business, and then subtract the proportion which relates to personal use.

Leasing a car if you operate a limited company

Leasing a car through a limited company means that it’s the company which owns the responsibility, so there’s less risk for you personally, but it also means that if you drive the vehicle for personal travel then it may be treated as a Benefit in Kind. This means you’ll pay tax on the value of the benefit, but the company can claim expenses associated with the vehicle.

The other option is to lease it personally, and then charge business mileage to your company so it can reimburse you based on the flat rate per mile of travel.

Hiring a vehicle

If you only need a vehicle for occasional business use, you may decide to hire one whenever you need it for a specific business journey. You can then claim the cost of hiring the vehicle as a business expense.

Owning a vehicle in a limited company

This bit gets it own section because limited companies are a separate legal entity to the people in them, so any assets it owns belong to the business, rather than you as a shareholder or director.

It’s a really important distinction because the vehicle can only be used for business purposes. If any personal travel does take place, then it’s likely to be classed as a Benefit in Kind, so you’ll pay tax on value of the benefit that you receive.

Beyond that, the company can claim for any expenses the vehicle incurs. Owning an asset through your limited company also means the business can use the vehicle’s depreciation to claim tax relief against its bill for Corporation Tax. Known as capital allowances, this area of the tax rules is particularly confusing, so do have a chat with your accountant about it!

Don’t risk getting it wrong!

HMRC may ask for evidence to support your claim for vehicle expenses, so make sure your records are accurate and well-organised. Keep all your receipts and records for at least six years after the end of the relevant tax year.

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.