Company car for a sole trader – is there such a thing? Is it better to buy or lease car if you are a sole trader?
Sole Trader Definition
If operate your business as a sole trader, your business only exists as a trading medium.
It does not ‘exist’ as a separate entity – unlike a limited company. This means that there is no legal difference between you and your business. You are you, trading as a “Company Name.”
It also means that the tax position of the sole trader is very different to the limited company. As we saw in our previous blog on car use as a business owner, limited companies have various tax efficient ways of using a company vehicle.
But how does that work if you are a sole trader? How should you pay for your vehicle? Business owned? Leased? Or privately owned and expensed?
Sole Trader Vehicle Options
The first thing to note is that, if you are a sole trader, there is no concept of a “company car” for you. Because there is no legal difference between you and your business, you will always own the vehicle.
Because of that, a sole trader can keep a car or van (and some other business related vehicles), in their own name on the registration V5 document. However, your sole trader business car motoring expenses can be met by your business, provided all private motoring elements are deducted.
If you are a sole trader, you can claim tax relief on business journeys in their vehicle. You can do this in two ways:-
1. Mileage Claims
If you have never claimed capital allowances on your car, you can use the simplified expenses method to work out the cost of your business journeys. Sometimes known as mileage claims, with this method you add up all your business mileage for the tax year (6th April – 5th April), then apply HMRC’s rate per mile to that.
For cars, HMRC’s rate is 45p per mile for the first 10,000 miles you travel on business in a tax year, then 25p a mile thereafter.
This rate is intended to cover all the costs of buying, running and repairing the car.
Put the result into your accounts as one of your day-to-day running costs. In this way it reduces your profit and so reduces the amount you pay tax on. This is how you claim tax relief on the cost of your business mileage.
2. Actual cost
Not every business can use the simplified expenses method (your accountant will help you find the best option). This might be because your car running costs are more than 45p a mile.
If this is the case, you can use actual cost to work out the amount you can claim as a running cost in your accounts.
To means adding up all your mileage, business and private, then working out the business mileage as a percentage of the total mileage. Eg. if 20% of your car journeys are business journeys, so 20% is the business proportion of the car’s use.
This business proportion can then be applied to all the running costs of the car, such as fuel, repairs, MOT, insurance, servicing and so forth. Eg. If fuel bills total £1,000, then the business proportion of your fuel would be £1,000 * 20%, or £200.
Do this for each running cost – these are the amounts you can include in your business’s accounts as day-to-day running costs for the car. If you’re using the actual cost method you can also claim capital allowances on the business proportion of the cost of the car.
Buying and leasing
If you buy the car with cash, or even with a loan or conditional sale, the car is yours at the end of the agreement and it will usually cost less to buy a car than lease it. A proportion of the running costs can be claimed as an expense giving you further tax relief.
If you are leasing, the car is not yours at the end of the lease unless you buy it, which is usually possible for a fee.
In this case, the car must be returned in exactly the same condition or the lease company will charge you for repairs such as scratched alloy wheels, stone chip, dirty seat covers, etc.
For a sole trader it’s simply a matter of what you can afford. Cash flow may be easier with leasing especially if you can’t get a loan, however, if you can buy, you will have a saleable asset at the end of the finance deal.
Every sole traders situation is different, so it’s best to talk to your accountant before going ahead with any major decision. For more information and to help you make the right decision for your business, contact us today.