Unincorporated businesses are allowed to use simplified tax deductions for motor expenses. As you would expect they come with conditions and drawbacks. When and how can you use them?

Tax only

Around ten years ago the government introduced simplified deductions which it said would make life easier for sole traders and partnerships (but not if the partnership has a corporate partner) when preparing their accounts. This sounds good but for many eligible businesses it’s an illusion.

Trap. Unless a business is very small, banks and other financial institutions will expect accounts to reflect actual expenses and not HMRC’s simplified figures. This doesn’t prevent you from using them for your tax return but you might still need to prepare accounts using normal rules.

What’s simplified?

Simplified expenses can be used for:

  • working from home expenses
  • adjustments relating to living on your business premises, e.g. in a guest house, nursing home, etc.; and
  • motor expenses for cars, vans and motorbikes.
  • We’re only looking at the latter in this article.

Work out the deduction

Calculating the deduction is indeed simple. Just multiply the number of business miles travelled in the accounting period by a mileage rate. For cars and vans it’s 45p per mile for the first 10,000 miles and 25p for each additional mile; and for motorbikes, it’s a flat 24p per mile. Note that while HMRC published a flat rate for bicycles this is only for employees, it isn’t a simplified deduction for business accounts.

What’s covered?

The deduction is to cover the purchase and running costs of the vehicle from the time it’s first used for the business to the time it ceases to be.

Tip. Expenses relating to a business journey rather than a vehicle, e.g. tolls and parking but not fuel, can be deducted in addition to the flat rate.

Tip. Using simplified expenses doesn’t affect your right to reclaim VAT paid on your actual motor expenses.

Trap. Flat rates can’t be used for vehicles for which you’ve claimed capital allowances (CAs), i.e. a tax deduction for the cost of a vehicle. If you’ve claimed CAs, you’ll have to wait until you stop using the existing vehicle to switch to simplified expenses. Once you start you must continue using the flat rate until you stop using the vehicle in your business.

Tax efficiency

Whether the simplified deduction is more or less tax efficient than claiming the actual costs of buying and running a vehicle depends on many factors, primarily how much you paid for the vehicle. As a rule of thumb, the lower its cost and the greater your business mileage, the more likely it is that simplified deductions will work for you. As you’ll need to keep a record of actual costs, it should be easy for you to make a comparison.

Tip. Wait until you’ve prepared your accounts to decide which method to use.

Simplified expenses can be used to calculate the tax deduction for the expenses of owning and running a car, van or motorbike used for business travel. Broadly, the lower the vehicle’s cost and the higher the business mileage, the more likely it is that simplified expenses will be tax efficient for you. You must still keep a record of actual costs.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.