Motor Vehicles Accounting and Taxation for Your Business
Accounting and taxation for motor vehicles is a complex area in general. The aim of this blog is to provide a general overview of accounting and taxation on motor vehicles for your business and what is allowed and disallowed in different cases.
First and foremost, there are slightly different regulations for business vehicles (purely for business purposes) and private vehicles (used for business purposes). The aim of this blog is to provide an overview for both types of vehicles.
Business Vehicles (Vehicles You Buy from the Business for the Business)
Any vehicle or van bought for business purposes needs to be recorded onto the balance sheet of the business. This will be depreciated annually, and any profit or loss made from selling the vehicles will be included in the business profit and loss account.
By having a business vehicle, there are certain expenses which then become allowable to claim against self-employment/partnership profits. These are:
- Fuel consumed by the business vehicle
- Insurance charges
- Road tax
- Repairs and maintenance expenses
- MOT expenses
- Monthly lease payments for leased vehicle (if applicable)
- Interest payment for hire purchase vehicle (if applicable)
VAT on Vehicle Purchase
Key points to note:
- VAT charged on all the expenses stated above will be recoverable if they are incurred for business purposes and in some cases if certain conditions are met.
- Road taxes, MOT, and insurances are non-VAT in most cases.
- VAT becomes claimable on fuel and repairs and maintenance.
- VAT charged on purchase of a vehicle is also recoverable if the vehicle is to be used solely and exclusively for business purposes e.g. vans, lorry, tractors etc. Due to private use restrictions no VAT can be claimed on cars unless the car is being used as a taxi or for driving instructions.
- For leased/rental vehicles, VAT on monthly lease/rental payments will be claimable (only 50% of VAT can be claimed on leased cars, unless the car is wholly and exclusively used for business purposes and is not available for private use).
Capital Allowances and Business Vehicles:
Before going into more details about capital allowances treatment, it is important to explain the difference between what HMRC classifies as a business car and a business van.
Per HMRC, a car for capital allowances purposes is a type of vehicle that:
- Is suitable for private use
- Most people use privately
- Was not built for transporting goods
Per HMRC, a van for capital allowances purposes is a type of vehicle that:
- Usually is not suitable for private use
- People would not or very rarely use privately
- Mainly built for transporting goods
*HMRC definition of Business Car: https://www.gov.uk/capital-allowances/business-cars
Capital Allowances for Business Cars:
You can claim capital allowances on cars you buy and use for your business. This means you can deduct part or full value of the car from your profits while calculating tax.
Business cars are recorded in a separate pool and are only eligible for writing down first year allowances. For a car bought for £5,000, the following will be claimable:
For tax year 2020/21, if the car you bought is new or unused and the CO2 emission is less than 50g/km or it is an electric car then the car becomes eligible for first year allowance and you can deduct 100% of the cost of the car from the first-year allowance.
New or second-hand cars with CO2 emission of 110g/km or less are subject to main rate allowance which is 18% of capital allowances that can be claimed each year. (£900 is claimable in the first year and the remaining £4,100 is the tax written down value or closing balance. This is carried forward to the next year and 18% allowance is claimed on this value. The same method is used each year.)
All cars above 110g/KM CO2 emission are placed as special rate pool and are subject to special rate allowance which is only 6% of capital allowances that can be claimed each year. (£300 is claimable in the first year and the remaining £4,700 is the tax written down value or closing balance. This is carried forward to the next year and 6% allowance is claimed on this value. The same method is used each year.)
Capital Allowances for Business Vans
The key difference between vans and cars is that vans are treated as a general pool asset. For general pool assets, Annual Investment Allowance (AIA) can be claimed up to the AIA amount (1 Million GBP for now). In cases where the AIA is fully claimed then the general pool rate of 18% cannot be claimed as capital allowances.
Private Vehicle Used for Business Purposes
In cases where there is no business vehicle recorded, but you are using your own private vehicle for business purposes then the private element of expenses such as car insurance, repair and maintenance, fuel, etc. are not claimable against self-employment/ partnership profits. Only the business element of the expenses is claimable. This can be worked out by maintaining a business mileage log. To calculate the private use element, divide annual business miles by total miles. For fuel, HMRC allows for mileage claim. Following are the rules for mileage claims:
Type of Vehicle
First 10,000 Miles
Above 10,000 Miles
Cars and Vans
45 Pence per mile
25 Pence per mile
24 Pence per mile
24 Pence per mile
20 Pence per mile
20 Pence per mile
Business mileage by bicycle is not currently claimable.
We advise you to make sure that you keep a complete record for business miles you travel using your private vehicle. We have a mileage recording spreadsheet for your use as well.
We recommend that you use Driversnote app (https://www.driversnote.com/) to keep track of your mileage.
VAT and Mileage:
Fuel Scale Charge:
To simplify accounting for VAT on the private use of fuel, a business can choose to apply the VAT fuel scale charge. This adds back a fixed sum, per VAT period, to account for private consumption of fuel purchased by the business.
The scale charge is calculated according to a car’s CO2 emissions and the fixed charge is added to output VAT, on the VAT return.
One scale charge must be used for each car that is put to private use.