Businesses have a choice when claiming certain expenses. James Bailey explains what expenses can be claimed on the basis of flat rate allowances.
From April 2013, it is possible for partnerships and sole traders, (but not limited companies or limited liability partnerships) to claim certain expenses on the basis of flat rates, rather than working out the exact amount actually spent.
There are three expenses covered:
- motoring expenses;
- business use of home; and
- private use of business premises.
Until 2013 it was necessary to calculate the total cost (of running the car or maintaining the home or the business premises) and then to arrive at a reasonable proportion to disallow as a non-business expense. In the case of a car, the split was made on the basis of business and private mileage over the period in question. In the case of premises, some sort of formula had to be devised to take account of the time spent on business or private use, and of the area of the property so used.
Apportionments often lead to disputes with HMRC. , and the new rules provide a simple alternative.
Motoring expenses:
The rate for business mileage is 45p per mile for the first 10,000 miles in the year, and 25p for any additional miles. For motorcycles, the rate is 24p per mile irrespective of the total mileage.
The 45p rate covers all the costs of buying and running the car, such as depreciation, insurance, fuel, repairs and servicing. It does not cover finance costs, so interest on a loan or the interest element of an HP or finance agreement can be claimed as well. Costs specific to a particular business journey such as parking, bridge tolls, and congestion charges can also be claimed.
If the 45p rate is adopted for a car, it must be used for the whole life of that vehicle in the business, and you cannot change back to the old method of claiming a proportion of the actual costs and capital allowances on the purchase price until you acquire a new vehicle. For the same reason, if you currently have a car on which capital allowances have been claimed, you cannot switch to the new system until you change cars.
Business use of home:
This covers heat, light, power, telephone and internet costs, and the rate depends on the number of hours per month spent in the home on ‘core business activities’. The rates are:
Hours per month spent at home on business Flat rate for the month
Under 25 Nil
25 - 50 £10
51 - 100 £18
101 –or more £26
The business proportion of Council Tax, insurance, and mortgage interest can be claimed in addition to the above flat rates.
Private use of business premises:
This applies to those who live on the job, such as pub landlords and proprietors of hotels and guest houses, where the premises are mainly used for business purposes. Here the flat rate is the amount to be excluded from the total running costs, and depends on the number of people living in the property. It covers heat and light, etc., but also food and non-alcoholic drinks. The amounts to be disallowed are:
Number living in property Flat rate per month
1 £350
2 £500
3 or more £650
Again, the business proportion of mortgage interest and council tax can be claimed as well, and business rates can be claimed in full.
Practical Tip:
Consider whether these flat rates will be better for your specific circumstances than the old apportionment method. You can use one or more of the flat rates as you wish, and (except for motoring expenses) you can decide from year to year which method to use.
