When it comes to calculating motor expenses there are a couple of methods available. What are they and what are the benefits or drawbacks of each method? Could careful planning reduce your income tax bill?

Method 1 - Actual cost

As suggested by the name the actual cost method looks at costs incurred. These would include the purchase of the vehicle (claimed by capital allowances at the appropriate rate) and running costs (fuel, insurance, maintenance etc.) If the vehicle is used partly for business and partly for private use a fair split should be made to determine how much of the overall cost is a business expense.

Method 2 - Mileage basis

Under the mileage basis a flat rate expense is claimed for miles driven (these must be wholly and exclusively for business purposes). No consideration is given for any running expense and importantly no capital allowances are available on the purchase of the vehicle. These are all factored into the mileage allowance. This is one of the most common errors people make with the mileage basis, incorrectly claiming capital allowances and mileage.

How does it look in numbers?

We will say Jane purchases a car for £22,000 for use in her sole trade business and personal use. The split is 60% business 40% private. She averages 16,000 miles in total per year.

Allowing for private use adjustment her expense under actual cost are:

Based on this example the claim made under the mileage basis is more valuable and would result in a combined tax & NI saving over the 5 years of approx. £2,000 for a basic rate tax payer.

Typically as a car ages the running costs will increase with higher maintenance costs year on year. A vital point to consider when choosing which method to use is that you cannot switch once capital allowances have been claimed or the mileage basis used. The only opportunity to change methods will be when the vehicle is disposed of and a new vehicle brought into business use.

The mileage basis reduces record keeping as no receipts are needed at all. However detailed mileage logs will be needed to support claims made. A work diary showing appointments and locations will help support and record this.

The risk with the mileage basis is the potential for large maintenance bills which could result in actual costs exceeding deductible costs. The mileage allowance has not been adjusted for some time and does not take account of fluctuating fuel costs or your vehicles fuel efficiency. If you drive a vehicle with excellent miles per gallon this will be a positive when considering the mileage basis. If fuel costs drop again this will enhance the value in a mileage based claim.

From these few points it is clear to see there is no easy answer. Ever vehicle and circumstance should be looked at closely on a case by case basis to achieve the best possible result.

Note - The current mileage rates available are:

Car & Van

- 45p per mile (>10,000)

- 25p per mile (<10,000)

Motorcycle

- 25p per mile (no mileage limit)

Bicycle

- 20p per mile (no mileage limit)

Options to change?

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