Travel Expenses For Partners and Sole Traders A tax guide

Transcription

1 Travel Expenses For Partners and Sole Traders A tax guide The Friendly Accountants Chartered Accountants Chartered Tax Advisers Directors: Lesley Ward BSc FCA Richard Baldwyn ATT CTA Arena Business Centre Holyrood Close Poole Dorset BH17 7FJ t: e: lesley@thefriendlyaccountants.co.uk w

2 Contents 1 What is business travel? Motor expenses Approved Mileage Allowance Payments (AMAP) VAT on fuel element of AMAP Strict calculation basis Fuel General running costs Cost of your vehicle Other Travel Costs Hotel and subsistence Summary... 19

3 Introduction We ve seen all sorts of weird and wonderful expenses claims made by clients over the years. Some we ve claimed (dental expenses) some we haven t (anger management classes - don t even ask). One of the most common problem areas and a question our clients frequently ask us is What travel expenses can I claim tax relief on? Well, this guide deals with the tax rules for travel if you re a self-employed sole trader or partner in your own business. We ve covered the tax rules for directors and employees in a separate guide.

4 Self-employed the tax treatment The overriding rule is that you can only claim a deduction for expenses that have been incurred wholly and exclusively for your business. What this means in practice is where travel costs are incurred partly for business and partly for pleasure, as long as you are able to specifically identify your business journeys you will be able to claim a tax deduction for these costs. Tip Remember to keep a detailed record of your business mileage and any related expenses so you can support any claim if this is ever queried by HMRC.

5 1 What is business travel? If you have a permanent base (for example an office) that is separate to where you live then any travel between home and that base is regarded as ordinary commuting and will not be tax deductible. If you carry out your business from home then you should be able to claim the cost of travelling between your home and where your work is carried out. However, be aware! HMRC are most likely to challenge the position where they suspect you artificially claim to operate a business from home by setting up an office there, though in reality you carry out the vast majority of your work at a different location regularly. Given their success at tribunal (notably the Noel White and Dr Samadian cases for those of you who like to read up!), HMRC are paying particularly close attention to the matter of travel expenses and taking a more bullish attitude. Tip Think very carefully about any home to office claims you are currently making in your business accounts. Obviously no two cases are alike, however make sure you have sufficient evidence to support the fact that your business operates from home. For example are your business records kept and written up at home? Do you keep you tools and equipment there?

6 2 Motor expenses Depending on your turnover, you have two ways of claiming for the cost of using your car for business either using the HMRC Approved Mileage Allowance Payments (AMAP s for short) or calculating the actual cost of use (strict calculation basis). We ll go through each of these in detail so you can see the difference but in general it s much easier to use AMAP. You can use HMRC s business expense checker to get an idea as to which method is financially better for you.

7 2.1 Approved Mileage Allowance Payments (AMAP) To make life easier, you can use fixed mileage rates to calculate your business travel costs rather than having to keep detailed records of all the expenditure incurred. As at 1 st April 2014 the fixed mileage rate is 45p per business mile for cars and vans for the first 10,000 business miles and 25p per mile thereafter. So if you travel 11,000 miles you can claim ,000 miles at 45p and 1,000 at 25p. You can see the up to date rates here. The rates are supposed to cover your fixed and variable running costs, for example petrol, maintenance, road tax, insurance and depreciation on the cost of your vehicle. (Don t blame us if the current rates are woefully insufficient!)

8 2.1.1 VAT on fuel element of AMAP If you re VAT registered and not flat rate VAT accounting, you can also claim VAT back on the fuel element of the mileage allowance (AMAP). So how do you calculate the fuel element? Well, you can use HMRC s advisory fuel rates which are published here. Example If you have a car with a 1500cc petrol engine, the fuel portion of the mileage rate is 16p per mile (as at September 2014). 16p per mile represents the VAT inclusive amount ie 120% (100% plus 20% VAT) So to work out the VAT included, you need to do the following: 16p 120 * 20 = 2.7p So you can claim 2.7p in VAT. But beware, you will need to show HMRC on request that you have enough VAT receipts to cover the claim. So for example, if 1,000 miles is claimed in the VAT period, then you will have claimed 27 in VAT (2.7p x 1,000). The fuel receipts will therefore need to total 154 (the VAT inclusive amount *120). Tip If you decide to claim your travel expenses using the fixed mileage rates you can only change this method when you replace your existing vehicle with a new one. You also cannot write off the cost of your vehicle for tax (see below) if you claim AMAP s. It s therefore worth considering very carefully beforehand whether claiming the business proportion of your car running costs might actually be more beneficial than claiming the fixed mileage rates.

9 2.2 Strict calculation basis If you choose not to use AMAPs, then you will need to calculate your motor expenses using the strict calculation basis be warned, this is nowhere near as simple as AMAPs. You will then need to calculate all the elements of your travel costs separately.

10 2.2.1 Fuel If you use your vehicle for both private and business mileage, you need to decide how to account for your fuel expenses including VAT on fuel. You should only claim for fuel costs which relate to your business journeys. If you are not VAT registered (or you are VAT flat rate registered) then this should include the VAT element of the fuel cost as well. So, for example, if 40% of your mileage relates to business and your gross fuel costs are 2,400 then you can claim 960 of fuel costs. If you are VAT registered (other than flat rate VAT accounting), then you should claim the business element of any net fuel costs. So if your gross fuel costs are 2400 and 40% of your mileage relates to business, you should claim 40% * 2,000 (being the net cost) = 888. VAT on fuel If you are VAT registered (and not using the flat rate scheme) you have several options as to how to account for VAT on fuel: 1. You can claim all of the input VAT on all your fuel costs regardless of whether they are for business or private journeys. You will then need to add a Fuel Scale Charge (FSC) to your VAT return each quarter - this effectively pays back some of the VAT claimed to HMRC. You can work out what your FSC will be here. Generally the rates will depend on your vehicle s CO2 emissions the higher the CO2 emissions, the greater the charge. 2. You can claim the VAT relating to the business element of your journeys only. So if you have gross petrol costs of 2,400 ( 2,000 net, VAT 400), total mileage of 10,000 and business mileage of 4,000 then you can claim net petrol costs of 800 ( 2,000 10,000*4,000) and VAT of 160 ( ,000*4,000). 3. You can elect to claim no VAT on your road fuel costs, therefore avoiding the need to pay any scale charges. You might find that this is the easiest (and least stressful) solution! If you choose this solution, you should claim the business proportion of the gross cost of fuel rather than the net cost.

11 2.2.2 General running costs Let s assume that during the tax year 2014/15 you travel 10,000 miles in your car, of which 4,000 are business related. Your motor running costs are as follows:- Insurance 550 Repairs/servicing 600 Tax 140 Total 1,290 You can therefore claim a tax deduction of 1,290 x 4,000/10,000 = 516 VAT on general running costs If you re VAT registered (and not flat rate VAT accounting), whilst you can only claim the business proportion of your net repair costs, you can reclaim all the VAT you're charged on repairs and maintenance for a vehicle so long as: the vehicle is used to some extent for business purposes the business pays for the work to be done It doesn't matter if the vehicle is used for private mileage or if you've decided not to reclaim the VAT on road fuel for business travel. Don t ask us why this is the case HMRC in their wisdom have decided this should be the treatment! However you obviously can't reclaim the VAT on vehicle repairs and maintenance if you use the vehicle only for your own private motoring! You can generally reclaim the VAT you pay on all other business motoring expenses - like fleet management charges and off-street parking. However, remember that if you use your car for both business and private motoring you'll only be able to reclaim the VAT on the proportion that relates to business use.

12 2.2.3 Cost of your vehicle As well as the general running costs of your vehicle, you can also claim an allowance based on the cost of the vehicle itself. How you claim that allowance will depend on whether you own your car (finance lease or bought outright) or are leasing your vehicle.

13 Owned vehicle You can claim a deduction against your business profits by applying a fixed percentage (generally 8%, 18% or 100%) to the purchase cost. This is known as a capital allowances claim. Remember this can only be claimed if you have elected not to claim mileage allowances. The percentage is applied on a reducing balance basis annually until the entire cost is written off or the vehicle is disposed of. Generally speaking, the amount of deduction that you can claim will be dependent on the amount of your vehicle s CO2 emissions and whether or not it is treated as a car or van for tax purposes. You will also need to apply a restriction to the capital allowances claim to reflect the private use of your vehicle (if appropriate). Example You buy a car for 15,000 and the relevant percentage is 18%. You travel 10,000 miles every year of which 6,000 miles are business related. The annual capital allowances claims are as follows:- Year 1 15,000 x 18% = 2,700 x 60% = 1,620 Year 2 12,300 x 18% = 2,214 x 60% = 1,328 Year 3 10,086 x 18% = 1,815 x 60%= 1,089 Year 4 8,271 x 18% = 1,489 x 60% = 893 Year 5 6,782 x 18% = 1,221 x 60% = 732

14 VAT on owned cars You won t generally be able to claim back any VAT on a car when you buy it unless you can show the car will ONLY be used for business purposes you will need to show good evidence that the car is never used for personal mileage either by you or anyone else. Examples of businesses that can claim back the VAT are those that use the car mainly as a taxi, a driving school car or a self-drive hire car and car dealers where the car is part of their stock in trade that is intended to be sold within a 12 month period. VAT on owned vans You can generally reclaim VAT when you buy a van or truck. However, be careful as to what HMRC define as a van or truck and, if in doubt, ask!

15 Leased vehicles If your vehicle is leased then you can claim the annual cost of the lease rental payments excluding VAT. Again a restriction is applied and the amount you can claim will be dependent on the amount of your vehicle s CO2 emissions and whether or not it is treated as a car or van for tax purposes. You will also need to apply a restriction to reflect the private use of your vehicle (if appropriate). Example Your annual vehicle leasing costs amount to 3,500 per annum excluding VAT. There is no restriction for CO2 emissions and the mileage is the same business proportion used in the previous example (60%). You can claim 3,500 x 60% = 2,100 per annum as a deduction against your profits.

16 VAT on leased cars There is a 50% restriction on recovery of input tax payable on vehicle leasing costs. No further reduction is required to account for private use. Note that you are only able to claim 100% on your car leasing costs where it is used purely for business (see above examples). VAT on leased vans The VAT treatment is different Vans are not cars as they are not subject to the 50% private usage restriction (see above). Therefore it should be possible to claim all of the input VAT back on van leasing costs. HMRC will only look to apply a private usage restriction, where they have compelling evidence that there is little or no business use of a van so remember not to take it with you on holiday!

17 2.3 Other Travel Costs In addition to expenses relating to your car running costs, you can also claim any parking fees, motorway tolls and congestion charges if these relate to business trips. You can also claim VAT on these expenses as long as they are business related. You can also claim tax relief for interest on any loan specifically used to purchase your car or van, though this will need to be restricted to reflect private use.

18 3 Hotel and subsistence As a general rule the cost of your food and drink incurred away from your place of business during the day time (and where an overnight stay is not involved) cannot be claimed as a tax deductible expense. This is on the basis that everyone must eat to live and so food and drink isn t incurred wholly and exclusively for your business (this precedent was established many years ago by the Caillebotte v Quinn tax case). (Please note: the position is slightly different if you are an employee see our separate guide). HMRC do accept that extra allowable costs for food and drink may be incurred where either the nature of your business is itinerant (for example a construction worker who works in a different location every week) or where you make an occasional business journey outside of your normal pattern (for example your business is based in Poole and you pay for breakfast on the way to attending a business conference in London). Where you undertake a business trip which requires you to stay away from home, the hotel accommodation and reasonable overnight subsistence costs will be tax deductible. However, where your business base is away from home and you pay for overnight accommodation and subsistence simply to allow you to be at or near where your business is situated this expenditure will not be tax deductible. Tip If it is necessary for you to take a business trip and stay in a hotel overnight, be sensible as HMRC might consider receipts for champagne paid for at Spearmint Rhino excessive!

19 4 Summary Tax doesn t have to be taxing as HMRC often likes to say, although travel expenses claims are an area that are coming under increased scrutiny from the taxman, If you do claim travelling and subsistence expenses incorrectly, it might be quite a few years until the taxman looks at your tax returns. If you ve not been accounting for your expenses correctly then not only will you end up paying extra tax and NIC, you may be in line for a nasty penalty too. Please note that all of this information is for guidance purposes only and should not be considered a replacement for advice from a suitably qualified professional.