The below applies to self-employed and sole traders. Different rules apply to limited companies.
Buying a car as a business expense is fairly common practice within the rules set out by HMRC. Depending on your line of work, buying a car through your business can be a really tax-eficent decision. However, the way you'll get tax relief will depend on how you pay for the car and it CO2 emissions.
You must remember that when it comes to self-employment taxes, you cannot claim for buying personal items through your business. That means you'll only ever be able to claim the business portion of your car, no matter how you buy it. If HMRC ever investigates you'll need to show evidence of how you use your car for work purposes. The easiest way to work out the split between personal vs business is to assign a simply percentage. For example you may use your car 60% business and 40% personal.
If you are self employed and buying a car, then there are 4 main ways you can expense the cost:
1. Claim mileage
2. Buying a car for cash
3. Hire Purchase
4. Claim lease payments
Let's look at each option;
If you buy your car personally, you can simply claim a fixed amount per mile every time you use it for business reasons. The fuel you can claim per mile currently is;
You'll need to record the miles you do and keep a detailed log of where you have travelled.
If you choose to claim the mileage allowance, you cannot claim for the cost of your car and expenses. The fixed rate is set higher than the cost per litre of fuel to cover running costs and wear & tear.
Another way to buy a car through your business as a sole trader is to pay cash and own it outright. If you choose this option, you can expense the cost of the business use element of your car. As a self employed sole trader the way you'll get tax relief on your car is by using Capital allowances.
Capital allowances are a way of giving you tax relief on more expensive items, like cars, that you keep for a number of years. You'll have to claim for a portion of the car cost, depending on it's emissions, using Capital Allowances:
If you choose to use this method for your new car, then you can also claim for fuel, servicing, insurance and repairs on your vehicle as tax-deductible expenses.
If you'd like an example or a rough illustration of how this would work for you then let us know and we'd be happy to help!
A sole trader car lease is another option for buying a car through your business if you don't want to own it outright. In this case, you'll claim for your self-employment car lease against your taxes.
You can also deduct for sole trader car expenses like fuel servicing, insurance and repairs against your tax. Again, only claim for your business use percentage for these expenses.
Buying a car via a hire purchase agreement is another way to get yourself a new car. If you choose HP, then similar to buying a car outright, you can claim capital allowances as well as any finance charges up to £500 associated with the agreement. Only claim for your business use percentage for these expenses.
