Sole traders who operate a vehicle for work purposes will have a choice to make between applying the current mileage rates or applying the full cost method. This blog post will explain how the full cost method works and how to apply this in practice. We previously blogged about the mileage rates that can be used to calculate the cost of all business mileage and these details won’t be repeated here, although we have provided a link to the previous blog post above. There have been no changes to the mileage rates stated and these are the current rates.
Methods for calculating the cost of motor travel
Essentially, if you drive your own car for business you can record the cost of this and doing so will reduce the amount of tax you pay on your sole trader profits.
There are two methods available for capturing the cost of business related travel within your own car. These are:
i) the mileage method – which includes multiplying the number of miles travelled for business by the approved mileage rate
ii) the full cost method – this aims to calculate the full real cost of the business travel within your own car
Full Cost Method
The full cost method is simply as it sounds and involves calculating your full car cost or expense for the year. The following steps identify how the business cost is calculated:
1. Add together all of your car expenditure during the year, which could be petrol expenses, the costs of services and repairs or even an MOT
2. Multiply this total cost by an appropriate business percentage to give the business proportion of the total cost
Let’s say that the total cost of all car expenditure for the year was £2,000 and you drove the car 50% of the time for business.
Your business expense would be: £2,000 x 50% = £1,000
We strongly advise all clients who are applying the full cost method to keep a detailed mileage log to identify all business and private trips made in the car. This prevents clients falling foul of HMRC should they face an inspection at any point.
Is this the best method for me?
This is a good question and the mileage rates may be better for many sole traders due to the simplicity of the method.
However, the HMRC approved mileage rates are not adjusted for larger vehicles, such an SUV, which tend to use a lot more petrol and are often repaired with more expensive parts. If you drive a larger and more expensive vehicle you may well benefit more from using the full cost method.
Capital allowances and tax relief
The full cost method allows you to claim capital allowances for the purchase price of the car you use and this will be explained in detail in our next blog update.