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Vehicle Mileage Rates for the Self Employed: What you Should Know
Her Majesty’s Revenue and Customs (HMRC) permits self-employed persons to claim mileage expenses. Mileage rates help you to keep a detailed record of your actual expenditure when you use your personal car for business activities. You are allowed to deduct any costs that you incur when you use your private car to boost business profits. If you use your private car to attend business calls and client meetings, you can deduct the expenses from the business turnover.
The mileage rate is optional, and if you decide to use it, you are not allowed to claim capital allowances. You do not have to be the legal owner of the vehicle that you are using for business activities to use the mileage rate. However, you have to be the person responsible for paying the expenses incurred to run and maintain the car.
What it Covers
The mileage rate covers all the expenses that you incur to run the vehicle and to maintain it. To recoup expenses means that you can claim for repairs, insurance, vehicle excise duty, fuel, servicing, oil, and Ministry of Transport Test (MOT). This mileage rate will also cover vehicle depreciation. It is important to note that you are not allowed to claim additional amounts for these expenses if you apply the mileage rate.
What is Not Covered?
The vehicle mileage rate does not include any expenses considered specific to particular trips such as parking fees, tolls, and congestion charges. These expenses can only be allowed to be part of the deduction if you incurred them specifically for business purposes. You are not allowed to claim for the expenses that you incur to travel from your house to the office.
As a self-employed individual, you need to monitor mileage expenses carefully if you want to take advantage of these rates. You need to know the precise mileage that you have covered as part of your business activities for an entire tax year. You should include the total mileage in your tax return, or you can simply inform your accountants. It is also advisable to keep all the receipts and records of the expenses you have incurred for the last seven years. HMRC may have to inspect these records at some point. The amount that you claim as mileage expenses are deducted from the business turnover before the HMRC does tax calculations. Claiming mileage expenses can help to reduce your administrative costs.
If you want to use the mileage rates, there are two options that you can apply. You can either use actual costs or fixed ones.
HMRC can calculate the claim you make based on actual fuel costs during the tax year. Claiming fuel costs is a good approach if you use the vehicle for business only. But this may not be practical because most self-employed people use their car for personal reasons as well. If you apply the actual cost approach, it may be difficult to determine exactly how much you can claim from each receipt. But using the actual costs also helps to protect you in case fuel prices increase. Fuel prices tend to fluctuate during the year, and the actual cost approach will ensure that you do not end up paying too many administrative costs. If you intend to use this option, you need to keep the actual receipts for the entire 12 months.
The second option allows you to claim a fixed amount on your mileage expenses. The fixed amounts are divided according to the type of vehicle you use and the distance it covers. For cars and vans, the approved mileage rate for the first 10,000 business miles for every tax year is 45p per mile. You get 25p per mile for every additional business mile that you cover using a car or van. If you have to carry passengers to carry out business activities, you allowed to claim an additional 5p for every passenger per mile.
For individuals who use a motorcycle for the business, the approved rate is 24p per mile. For self-employed persons who use bicycles, the mileage rate is 20p per mile.
The fixed rates can vary over the years, but they may also remain unchanged for long periods. On some occasions, you may incur high administrative costs because they do not consider fuel price changes. It is possible to switch between the actual and fixed mileage rates but only if you use a different car and not within the same tax year.