When it comes to claiming vehicle expenses for your business, deciding between mileage allowances and actual fuel costs can significantly impact your tax efficiency and financial management. Each option has its advantages, depending on how your vehicle is used, the size of your business, and your record-keeping habits.
In this blog, we’ll break down the differences between claiming mileage and fuel costs, the tax implications of each, and how to choose the best option for your business.
1. What Are Mileage Allowances?
Mileage allowances, also known as the Approved Mileage Allowance Payment (AMAP) rates, are designed for individuals using their personal vehicle for business purposes. Instead of claiming specific expenses like fuel or maintenance, you can claim a fixed rate per mile driven.
Current HMRC Mileage Rates (2024):
- Cars and Vans: 45p per mile for the first 10,000 miles, then 25p per mile.
- Motorcycles: 24p per mile.
- Bicycles: 20p per mile.
These rates are intended to cover all running costs, including:
- Fuel
- Maintenance and repairs
- Depreciation
- Insurance
Key Benefits of Mileage Allowances:
- Simplicity: No need to track individual costs like fuel, repairs, or depreciation.
- Tax Efficiency: Reimbursements at HMRC-approved rates are tax-free.
- No Depreciation Calculations: Ideal for employees or sole traders using personal vehicles.
2. What Are Actual Fuel Costs?
Claiming actual fuel costs involves recording the exact amount spent on fuel and deducting it as a business expense. This method is typically used when a company vehicle is provided or when accurate tracking of business versus personal mileage is possible.
What Can Be Claimed?
- Fuel purchases for business trips.
- A proportion of total fuel costs based on business use (if the vehicle is also used personally).
Key Benefits of Claiming Fuel Costs:
- Detailed Tracking: Better suited for businesses with company vehicles.
- Flexibility: Useful when fuel costs are higher than the mileage allowance covers.
- VAT Recovery: If registered for VAT, you can reclaim VAT on business fuel expenses.
3. Mileage vs Fuel – A Detailed Comparison
| Aspect | Mileage Allowance | Actual Fuel Costs |
|---|---|---|
| Ease of Use | Simple to calculate and track. | Requires detailed record-keeping. |
| Coverage | Includes fuel, repairs, and depreciation. | Covers fuel only; other costs claimed separately. |
| Tax Treatment | Tax-free up to HMRC-approved rates. | Taxable if not carefully apportioned. |
| Best For | Personal vehicle use. | Company vehicles or high fuel consumption. |
4. Factors to Consider When Choosing
When deciding between mileage and fuel, consider the following:
A. Frequency of Use
- If you only use your vehicle occasionally for business purposes, mileage allowance is often the simpler option.
- For frequent or high-mileage users, actual fuel costs might be more tax-efficient.
B. Type of Vehicle
- Larger or less fuel-efficient vehicles might cost more to operate than what the mileage allowance covers, making fuel cost claims more advantageous.
C. Administrative Capacity
- Mileage allowances require minimal record-keeping: simply track the miles driven.
- Claiming fuel costs requires detailed receipts and records of business vs personal use, which may increase administrative burdens.
D. VAT Registration
- If your business is VAT-registered, claiming actual fuel costs allows you to reclaim VAT on fuel used for business purposes. Mileage allowances do not offer this benefit.
5. Tax Implications of Mileage vs Fuel
Mileage Allowance
- Payments made at or below the HMRC-approved rates are tax-free.
- If payments exceed these rates, the excess is treated as taxable income.
Fuel Costs
- Claiming actual costs requires you to apportion usage between business and personal.
- Any private use must be accounted for and excluded to avoid tax implications.
Example
Emma drives 12,000 miles a year, 8,000 of which are for business:
- Mileage Allowance: She claims 45p per mile for the first 10,000 miles and 25p thereafter, totalling £3,200 tax-free.
- Fuel Costs: She spends £2,500 on fuel annually. Since 67% of her driving is for business, she claims £1,675 as a business expense.
While the mileage allowance offers simplicity, Emma finds claiming fuel costs more tax-efficient due to her high vehicle usage.
6. Case Study: Choosing the Right Method
Tom, a self-employed consultant, drives his personal car for business. He consulted COPA Accounting to determine the most tax-efficient method:
- Tom drives 10,000 business miles per year and spends £2,000 on fuel.
- Using the mileage allowance, he could claim £4,500 tax-free.
- Claiming fuel costs and other vehicle expenses (insurance, repairs, depreciation), his total deductible expenses came to £3,800.
COPA Accounting recommended the mileage allowance for its simplicity and higher tax-free claim.
7. Tools to Simplify Vehicle Expense Tracking
- MileIQ or TripLog
- Automatically track and log business mileage.
- Fuel Receipts Apps
- Apps like Expensify help you record and categorise fuel receipts.
- Accounting Software
- Use Xero or QuickBooks to integrate mileage and fuel expenses into your accounts seamlessly.
8. How COPA Accounting Can Help
At COPA Accounting, we help businesses optimise vehicle expense claims, ensuring compliance and maximising tax savings. Our services include:
- Expense Review
- Assess your driving patterns and recommend the most tax-efficient method.
- Record-Keeping Support
- Provide tools and guidance to track mileage or fuel expenses accurately.
- Tax Planning
- Develop strategies to reduce your tax liability through vehicle expense optimisation.
- VAT Recovery
- Assist VAT-registered businesses in reclaiming VAT on fuel expenses.
Conclusion
Choosing between mileage allowances and fuel cost claims depends on your driving habits, administrative capacity, and tax position. Both methods offer unique advantages, and the right choice can save you time and money.
At COPA Accounting, we provide expert advice to help you make the best decision for your business. Contact us today to learn more.
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