We often get asked about claiming for the cost of fuel used for business purposes and what happens if such business fuel also gets used for personal trips as well. As with all expense legislation, there are several different methods and it all depends on your business entity and the type of vehicle you use.
As a Sole Trader it’s very likely that you are using your own vehicle for business purposes. Perhaps it’s a once a week visit to the wholesaler or maybe it’s for carrying the tools of your trade and moving from customer to customer, either way the line between what is used for personal and business purposes can become very blurred.
To make things easier HMRC has created Simplified Expenses, a collection of flat rates allowable for use with some of the most common expenses, including the use of fuel.
For simplified expenses, the key here is good mileage records using a simple spreadsheet or travel app such as Tripcatcher . Mileage records allow you to split business and personal use so you can claim the correct value as part of your self assessment tax return. You can choose to pay for the fuel out of your own pocket or purchase all fuel from the profits of the business, whichever way you do this the result will be the same, you will only claim for the business element of fuel used.
If purchasing the fuel, yourself you will need to record all mileage and details of the trip, whether business or personal. At the end of every week, month or year you will then add up all the business miles travelled. This total will be multiplied by the correct mileage rate, currently 45p per mile up to 10,000 miles and 25p per mile thereafter. The business will create an expense within the accounts, and you will reimburse yourself for the business fuel you have paid for via a bank payment.
Should you decide that the business will pay for all fuel, you will still need to keep details of all personal and business use and calculate as above but on this occasion you will deduct the value of fuel used for business purposes from the total amount spent on fuel. The amount remaining will relate to personal mileage and will be disallowed, decreasing the expense of fuel and increasing the businesses profits.
The downside of this method is that no other costs relating to the upkeep of the vehicle can be claimed, including maintenance and repair. You must also continue to use simplified expenses for as long as you use the vehicle within your business, you cannot change from year to year.
On some occasions it can be more beneficial to claim actual fuel costs incurred. Using the actual cost method, you can not only claim for fuel expenses, but also a percentage of other vehicle related costs. Things do however get a bit more complicated as a fair split needs to be decided for business and personal use, and you must also keep receipts for any vehicle expenses you wish to claim.
In using this method, all fuel costs incurred by the business will need to be pooled together and a suitable percentage decided. It can still be helpful to keep mileage records as this will provide a good indication of the total miles travelled for business and personal purposes. The key is to be reasonable as you will need to be able to back up any expenses claims made within your accounts.
For Sole Traders the biggest risk is claiming 100% of fuel costs when they relate to both business and personal use. Claiming a higher rate of fuel expense can become costly should you be chosen for a HMRC inspection. If you cannot provide adequate records to support your fuel claim, you could see original expense values amended and a demand for additional tax.
You must also be mindful that should you use the cash basis scheme you cannot apply simplified expenses on vehicles you have claimed additional reliefs on or expensed in full when calculating your business profits, talk to an advisor.
For sole traders, VAT can be claimed back on mileage but only on the actual expenditure in relation to business miles travelled and HMRC’s approved mileage rates.
Directors using their own vehicle for business trips and claiming Mileage Allowance Payments
You will need to record details such as:
- the vehicle used for the journey;
- your journey date;
- the number of miles travelled and;
- the reason for your trip;
Unfortunately, there are restrictions which means that HMRC do not allow the whole amount of any fuel purchased to be claimed as an expense, instead you receive an approved mileage rate. This mileage rate starts at 45p per mile for the first 10,000 business miles you travel, reducing to 25p per mile thereafter. The good news is that claims can also be made for the use of Motorcycles at 24p per mile and Bicycles at 20p per mile. An extra 5p per mile can also be claimed if a co-worker travels with you in the same vehicle for the same business trip.
The usual practice to claim your mileage allowance is the completion of an out of pocket expense form. We advise that you keep a copy of your receipt and attach this to your claim form before processing any reimbursement.
Directors using a Company Car with an element of private use
For Directors using a company car, the method is a little different. This is because it is expected business trips will be made in the vehicle provided to you by the company for performing your employment duties. The downfall here however is that if the vehicle is made available to you for private use as well, a tax liability arises not only for the fuel use but also on the value of the car provided.
Sticking to the fuel side of things, to avoid any taxable charge on fuel used for personal purposes, Directors can choose to:
- buy their own fuel and reclaim the business mileage using Advisory Fuel Rates, set by HMRC twice a year;
- pay back the company the value of fuel used for private journeys using the Advisory Fuel Rates.
The Advisory Fuel Rates are based on engine size and fuel type e.g. petrol, diesel, electric or hybrid.
Such cars are those that are used within the company by all employees to undertake business related trips only. These vehicles will usually be held at the businesses trading address and provided to employees on a booking system.
The use of pool cars is suggestive of sole business use. If of course there are exceptions when such cars are used for personal reasons other than those prescribed, a tax liability may arise unless the use is ‘purely incidental’, such as taking the vehicle home as a result of leaving early for business travel the next morning.
It is vitally important to keep detailed mileage and vehicle use records ensuring that dates, employee names and purpose of trips are recorded.
For Limited Companies, the risk here is if you claim more than 45p per mile, as this is classed as extra income or a Benefit in Kind. Receiving such a ‘perk’ comes with tax implications and may see your tax-free allowance, currently £12,500, reduced in the following tax year to compensate for this extra income received.
The business will also be liable to report such benefits via a P11D and P11D(b) form and will be required to pay National Insurance Contributions on the total value of the benefit provided over and above the approved mileage rate. If on the other hand, you receive less than HMRC’s approved mileage rates per business mile travelled, you can claim Mileage Allowance Relief and receive the difference back in a tax reduction against PAYE or Self Assessment.
Note however that business mileage claims cannot be made for travel from your home and normal place of work, the exception of course is if it is a temporary workplace e.g. you are an electrician visiting customers’ homes.
For Limited Companies, VAT can be claimed back on mileage expenses.
If the expense relates to employee reimbursement where a private vehicle is used, only the actual expenditure in relation to business miles travelled and HMRC’s approved mileage rates can be claimed.
For company cars, VAT can be claimed in relation to the Advisory Fuel Rate whether this relates to a charge being made to the employee as a result of private use or the employer reimbursing the employee for business miles travelled, only the VAT on actual business mileage can be claimed.
For pool cars where no private mileage applies, 100% of the VAT can be reclaimed by the business.