Are Car Subscriptions Tax Deductible

What are allowable business expenses?

Tax deductible items may initially appear quite simple, however, there are often caveats you need to be aware of. You can claim allowable business expenses for:

  • vehicle insurance
  • repairs and servicing
  • fuel
  • parking
  • hire charges
  • vehicle license fees
  • breakdown cover
  • train, bus, air and taxi fares
  • hotel rooms
  • meals on overnight business trips

You cannot claim for:

  • non-business driving or travel costs
  • fines
  • travel between home and work

Woman in blouse filing taxes

 

1. Company Subscription Car Tax Deductibles

If your company is subscribing a vehicle, you don’t own it. That means that you can claim your monthly subscription payments as a business expense. Nevertheless, for cars with CO2 emissions above 130g/km, there’s a flat-rate disallowance of 15 percent of relevant payments. In other words, 15 percent of the expense is not allowable for tax purposes. Of course, your running costs of the car include insurance and tax, and these are deductible expenses under the Corporation Tax.

2. Reclaiming VAT on a car subscription

If you have some private mileage on the car, you can claim back 50 percent of the VAT on the subscription itself, but if the car is used entirely for business, you’ll get back 100 percent of the VAT on the subscription. For a van, you can claim 100 percent back in all circumstances. If you get a maintenance package with your agreement, they’re also 100 percent VAT reclaimable. And if you need to hire a vehicle through the company because one of your vehicles isn’t running, you can get back half the VAT on the subscription there, too.

Hire a car for any other reason – for example, a new sales rep is starting but their car isn’t ready yet – and you can get back all of the VAT for up to ten days. You can also reclaim your VAT if you use a subscription car just for a day, provided it’s purely for business. In short, when it comes to company cars, it makes sense for SMEs to choose subscription over loans, because of the benefits of tax dectuctible and VAT-reclamation.

3. Self-employed Tax Deductions

If you’re self-employed and you use your car or van for work, it makes sense that your motoring expenses are tax deductible, right? Right. As with everything, the reality is a little more complicated. Let’s take a closer look.

What counts as business travel?

When is business travel not business travel? Why are you making the journey? The key with this is that any mileage you claim must be solely and directly relevant to your business. So, let’s look at what doesn’t qualify as a business trip. HMRC is pretty clear that simply driving to work – your daily commute – is definitely not a business trip. Let’s say you drive to the office, pop out to meet a client, then go back to work and finally drive home at 5 pm. HMRC tells us that only the journey in the middle to meet the client can be described as business mileage. If, however, you go to meet a client straight from home, then drive into the office, then drive back home again, it might be possible to claim for the first two journeys, so long as you can prove they’re a noticeably different trip to your usual commute. If you bob down to the office in the evening (outside your usual hours), we’re sorry but you can’t claim for that, either. Just to muddy the waters, HMRC has a 24-month rule for freelancers or contractors asked to work in a different place temporarily. They say that you can claim back mileage to and from your main place of work only if you’ll be there for less than 24 months. Any longer than that and the taxman sees it as your permanent place of work. But what other motoring expenses are tax-deductible? That depends on how your business is set up.

4. Sole Trader

Sole traders or partnerships that are not VAT-registered can choose between the full-cost method or mileage method. It all depends on how much business use your vehicle gets.

‍Full-cost method

This is the way to go if you use your vehicle mainly for work with barely any personal use, for example, a van. Add up all your costs, then deduct the costs of private use.

‍Claim for:

  • Fuel
  • Car repairs and MOT
  • Road tax, insurance, breakdown cover
  • The capital cost of buying the vehicle

Don’t claim for:

  • Private use element
  • Speeding fines and other offences

So how do you work out the private-use element? Simply divide your annual business miles by your total miles. It’s key to record all your mileage and then work out your figure for private use. If you don’t keep an accurate record, you can provide an estimate of private use, provided you can prove it’s realistic.

‍Mileage method

This works best if you mainly use your vehicle privately, with just the odd business trip. Note that it’s vital to record all your mileage if you’re using this method.

‍Claim for:

  • Business mileage allowance at HMRC rate – 45p/mile up to 10,000 miles, then 25p/mile
  • Toll costs
  • Congestion charge

Don’t claim for:

  • Private use mileage
  • Fuel
  • MOT and repairs
  • Tax, insurance, breakdown cover
  • Buying the car
  • Speeding fines and other offences

Note that, with the mileage method, you don’t need to make all your trips in one car. If you’re a two-car family, either car will be fine. The HMRC mileage rate takes into account all your motoring costs – filling up, topping up with oil, servicing, insurance, repairs, road tax and annual MOT. This rate also takes account of depreciation. That’s why you can’t make separate claims for these elements. If you’ve claimed the cost of buying your car or van using capital allowances, you’re restricted to the full-cost method.

5. Does VAT registration affect motoring expenses?

So, what happens if you’re VAT-registered and claiming mileage expenses? What you can claim and how you do so differ slightly. Here’s the simplified version of what is a tricky area.

Sole traders

If you’re a sole trader, you won’t be able to use the mileage method for VAT, assuming your turnover is reaching the VAT threshold. If you’ve voluntarily registered for VAT and aren’t reaching the threshold, you’re OK. So, use the full-cost method, but bear in mind that claiming for VAT on fuel comes with a few complexities.

Limited company

Limited companies can use either the full-cost or mileage method for VAT. With the mileage method, you can claim VAT only on the fuel part of the mileage allowance. It’s worth remembering that the mileage allowance doesn’t just take fuel usage into account: it’s all about wear and tear as well. HMRC has an advisory fuel rate, which changes regularly.