Should Sole Traders Claim Mileage or Vehicle Expenses? A Guide for Wise Tax Decisions

Introduction:

Being a sole trader comes with a myriad of responsibilities, and managing your finances efficiently is key to your success. One area that often perplexes sole traders is deciding whether to claim mileage or vehicle expenses for work-related travel. The choice you make can significantly impact your tax obligations and overall financial health. In this blog, we'll explore three common scenarios and help you make an informed decision. However, always consult your accountant for personalised advice.

Scenario 1: The Dedicated Work Van Owner

If you're a sole trader who owns a work van exclusively used for business purposes, you're in a fortunate position. In this case, claiming vehicle expenses is usually the most advantageous option. This means you can deduct expenses like fuel, maintenance, and insurance related to your work van.

Why is this a good choice? Well, it allows you to maximize your tax deductions since your van's entire usage is for business. Just make sure to keep meticulous records of all expenses, and ensure your vehicle is properly insured for business use.

Scenario 2: The Partly Business, Partly Personal Vehicle Owner

For sole traders using a vehicle that serves both personal and business needs, it's important to calculate the percentage of business use accurately. For example, where 60% of the vehicle's use is for work, it could make the most sense to simply claim 60% of all motor vehicle expenses.

This approach ensures you're only deducting the portion of expenses directly related to your business activities, which is both ethical and compliant with tax regulations. Maintain detailed records of your mileage and expenses to support your claims during an audit. Also, ensure your vehicle is adequately insured for business use, as mentioned earlier.

Scenario 3: The Occasional Business Use of a Private Vehicle

In some cases, sole traders might use their private vehicle occasionally for work-related travel. If you fall into this category, claiming mileage instead of expenses is generally the more straightforward option.

The mileage method allows you to claim a fixed amount per mile travelled for business purposes. This is simpler than tracking all vehicle expenses individually. Remember, commuting expenses from your home to your regular workplace are not tax-deductible, so only claim mileage when you're traveling for work purposes outside your normal commute.

Additional Considerations:

1. Consult with Your Accountant: Your unique financial situation may require a tailored approach. Always consult with a qualified accountant who can provide personalised guidance based on your specific circumstances.

2. Insurance Matters: Whether you choose to claim expenses or mileage, ensure your vehicle is adequately insured for its intended use. Failing to do so could lead to complications in case of accidents.

3. Record-Keeping: Maintain meticulous records of your vehicle-related expenses, mileage logs, and receipts. This will be invaluable when calculating your tax, and in case of audits.

Conclusion:

As a sole trader, deciding whether to claim mileage or vehicle expenses depends on your individual circumstances. Scenario 1 with a dedicated work van generally favours claiming expenses, while Scenario 2 involves a partial deduction. Scenario 3, with occasional business use of a private vehicle, often leans towards claiming mileage.

Remember that commuting expenses are not deductible, and proper insurance coverage is crucial. Ultimately, your best course of action is to work closely with your accountant to determine the most advantageous approach for your business, ensuring you're making the right financial decisions while staying compliant with tax regulations.