Work vehicles tax implications for sole traders

How might sole traders need to consider mileage and vehicle leasing when completing their expenses for self assessment tax returns?

For many self-employed people, driving is an integral component of business. Whether it involves picking up supplies, dropping off deliveries, seeing customers, or making site visits to quote for jobs.

Over the course of a year, the miles add up. With annual tax returns to consider, self-employed people may be left with questions. Here we focus on answering the commonly asked questions of sole traders concerning the tax implications for mileage, expenses, and vehicle leasing.

 

What is 'mileage allowance'?

Many sole traders claim mileage allowance, a flat-rate per mile scheme. This scheme provides a straightforward way to claim back the cost of using your own vehicle for business purposes.

Those using more than one vehicle for business, don’t have to use the flat-rate mileage allowance for every vehicle. It is possible to mix and match, claiming the mileage allowance for some, and actual cost for others. It should be noted, however, that once the flat rate mileage allowance option is used for a certain vehicle, it cannot switch back.

 

How much mileage allowance can you claim?

If you’re self-employed, you can claim a mileage allowance of:

• 45p per business mile travelled in a car or van for the first 10,000 miles (25p per excess business mile)
  
  
• 24p a mile for motorbikes used for business purposes
  
  
• An additional 5p per mile for any of your businesses workers accompanying as a passenger

You may also continue claiming for other business travel expenses, such as train tickets and taxi rides, whilst claiming mileage allowance.

When can you not claim mileage allowance?

• Personal journeys, i.e., those not “wholly and exclusively for business purposes”
  
• Journeys to and from your usual place of work
  
  
• For cars purpose-built for commercial use, such as specifically designed taxi’s or driving instructors’ cars built with dual-control
  
  
• On a vehicle you have already claimed capital allowances for or a vehicle you have included as an expense when calculating business profits

Working out your business mileage

Logging your business mileage as you go makes for a simpler claims process. The more detail you provide, the more credible your claim. For example, providing precise dates, mileage, and journeys all benefit. This is especially true in the event of HMRC requesting proof during an investigation.

Another way to claim for mileage is to claim for a percentage of your vehicle’s total annual mileage. So, if you know your car is used exactly half the time for wholly business purposes, then you may expense 50% of the annual cost.

Take note that deliberately increasing your mileage allowance claim may result in penalties. HMRC are extremely wary of those deliberately entering false information during tax returns.  
 

What about vehicle leasing: How does it work?

Here are the three main options when leasing a car:

• Personal contract hire – an initial payment followed by monthly payments for a car you hand back at the end of the contract.
  
  
• Personal contract purchase – a deposit followed by monthly payments. You may opt to make a final “balloon payment” at the end of your contract in order to buy the car.
  
  
• Business contract hire – a popular choice for sole traders. A version of personal contract hire that’s tailored to the needs of businesses.
   

Is leasing a vehicle tax deductible?

Leasing or hiring a car is tax deductible, otherwise known as an allowable expense. However, the amount you can claim back is dependent on a few factors including whether or not your business is VAT registered, the use of the car, and its CO2 emissions.

When discussing leasing a vehicle, ensure you ask about the tax implications of the vehicle’s CO2 emissions. If you partially use a lease or hire vehicle for personal use, this proportion cannot be claimed as an allowable expense. It must be calculated and deducted.
 

Completing your self assessment tax return

As a sole trader, each year you must report any allowable vehicle and non-vehicle related expenses via your self assessment tax return (SA100).

It's important to note that there is a wealth of resources and guidance to help you through your yearly tax returns. It doesn't have to be stressful, start by trying out GoSimpleTax’s free Self Assessment Tax Return Calculator.