If you are a business owner, some of your business expenses can be deducted from your tax bill.
The way it works is relatively simple. If your turnover is £40,000 and you claim £10,000 in allowable expenses, then you only pay tax on the remaining £30,000. This is known as your taxable profit.
Of course, there are plenty of rules surrounding how you claim expenses from HM Revenue and Customs (HMRC) – and what you can claim expenses on. If it saves you money in the long-run, it’s important to know the rules and understand what you need to do to claim expenses.
One thing that you may not realise that you can claim as an expense is travel expenses – although special rules apply depending on your circumstances.
Can I claim travel expenses?
If you are working through a limited company, you can choose to claim for mileage, using the HMRC’s Approved Mileage Allowance Payment – currently at a rate of 45p per mile for the first 10,000 miles, and then 25p per mile if you go over this. (Different rates apply if it is a company car). This figure includes an allowance for your petrol and the wear and tear on your vehicle. Your alternative option is to make individual expense claims for your petrol, insurance, tax, and servicing.
For many freelancers, contractors and otherwise self-employed individuals, travel is a part of everyday life. You travel to see clients, work in other offices and visit sites. Over the year, all that petrol you use can add up – not to mention the wear-and-tear all those miles put on your vehicle.
If you are working self employed, the rules are more complicated. You can use mileage based on the HMRC’s Approved Mileage Allowance Payment, if when you bought the vehicle your business’s turnover was under the VAT registration amount (currently £85,000). If your annual turnover was above the threshold you must calculate the full cost of the car during the year and claim your business proportion of the spend, together with capital allowances on the business proportion of the vehicle’s cost.
Travel expense claims explained
So how do you claim tax relief on car-related expenses? Here are some things you need to know:
- You can claim travel expenses for all travel to and from a temporary place of work (subject to the 24 month rule if you are working through a limited company).
- You cannot claim for travel between home and your normal place of work.
- You can claim for breakdown cover
- You cannot claim for non-business related driving or travel costs.
- You can claim for parking fees.
- You cannot claim for fines.
- Depending on your circumstances, if your company purchases a company car, you can claim the cost as a capital allowance. You’re best off speaking to an accountant on this before you make the purchase as you need to understand the benefit in kind rules.
Other travel-related items that you can claim allowable business expenses for include:
- Hire charges
- Train, bus, air and taxi fares
- Hotel rooms (rules apply)
- Meals on overnight business trips
Note that if you claim mileage you can’t also claim separately for fuel and other costs.
The 24-month rule
As a freelancer or contractor, if you are working for a limited company, it’s probably rare that you’ll stay in the same place for more than two years at a time, but if you do, HMRC will consider that to be your permanent place of employment. Therefore, you won’t be able to claim expenses for travel to that location. The rule also states that as soon as you know your contract is going to exceed 24 months you must immediately stop claiming temporary work place expenses.
That is, unless you qualify for the 40 per cent rule – which states that if you spend less than 40 per cent of your working week, at the client’s site, you can continue to claim mileage, no matter how long the contract lasts.
IR35: If you are inside IR35 the 24-month rule does not apply and all places of business are treated as permanent.
Claiming expenses from home to work
As with anything tax-related, it’s important to keep original receipts (or electronic copies) for all of your business costs for 6 years. This will serve as proof of expenditure if HMRC require evidence.
Be sure to check with HMRC, or your accountant, about how much you can claim per mile travelled – as it depends on how many miles you travelled and whether the car is a company car or private vehicle.
If you’re operating as a Sole Trader, your expenses should be reclaimed through your Self Assessment tax return. If you’re a Limited Company Director or employee, you should be able to reclaim certain travel expenses, check with your umbrella on what you can reclaim. If you’re a Limited Company Director or employee, you can reclaim any expenses incurred through your business, which will reimburse you (helping to reduce your tax burden).
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