Flat rate expenses – a good idea or not?

Since 2013 businesses have been allowed to use simplified deductions for motor (and other) expenses, to work out their taxable profits. This sounds like it might suit you, but could you lose tax relief by making the switch?

Flat rate or simplified?

It’s five years since flat rate tax deductions were introduced. Their proper title is simplified expenses, but in practice using them doesn’t actually simplify anything, but on the plus side they can be tax efficient. Only unincorporated businesses, i.e. sole traders and business partners, can use them, but not if a company is a member of the partnership.

Which expenses?

Simplified expenses can be used for costs you incur in:

  • working from home
  • living on your business premises, e.g. in a guest house, nursing home, etc.; and
  • motor expenses for cars, vans and motorbikes.

We’ll concentrate on motor expenses here.

How much can you claim?

Calculating the motor expenses is the easy part of using the simplified deduction. It involves multiplying the number of business miles travelled by a mileage rate. For cars and vans it’s 45p per mile for the first 10,000 miles and 25p for each additional mile. For motorbikes, it’s a straight 24p per mile for all mileage.

Relevant costs

The deduction covers all purchase and running costs of the vehicle from the time it’s first used for the business to the time it ceases to be.

Tip. Expenses relating to a business journey rather than a vehicle, e.g. tolls and parking but not fuel, can be deducted in addition to the flat rate. Don’t record them in your books as motor expenses as it’s then easy to overlook them. Record them with your other travel expenses.

Trap 1. Flat rates can only be used for vehicles where you haven’t claimed capital allowances (CAs), i.e. a tax deduction for the cost of a vehicle. If you’ve claimed CAs, you’ll have to wait until you stop using the existing vehicle to switch to simplified expenses. Once you start you must continue using the flat rate until you stop using the vehicle in your business.

Trap 2. Using simplified expenses doesn’t mean you can stop keeping records of your actual motor expenses. Strictly, your business accounts should still show these. Lending and insurance companies, and your bank, might ask for accounts using actual rather than flat rate expenses.

The million dollar question

Which is more tax efficient, flat rate or actual expenses? There’s no simple answer as there are many variables, e.g. the cost of the vehicle and repairs. As a rule of thumb, the lower the cost of the vehicle and the greater your business mileage, the more likely it is that the flat rate will benefit you. Our comparison calculator can help you decide (see The next step ).

Tip. Wait until you’ve prepared your accounts to decide which method to use. That way you can compare the options to see which is most tax efficient.

Summary

The tax efficiency of simplified motor expenses depends on the vehicle’s cost plus running expenses and the business mileage compared with total mileage. As a rule of thumb, the lower the vehicle’s cost plus expenses and the higher the business mileage, the more likely it is that simplified expenses will be tax efficient.