When it comes to claiming vehicle costs, many small business owners/sole traders are automatically put on the mileage method. It is simple. It is familiar. And it is often what accountants recommend. But the easiest option is not always the best one for the client.
In this post, we explain the two ways to claim vehicle costs and why in many cases claiming actual expenses can be more beneficial even though it requires more record keeping.
The two ways to claim vehicle costs
There are two main ways to claim for using a vehicle for business in the UK:
1. Mileage allowance
2. Actual vehicle expenses
Once you choose a method for a particular vehicle you are typically committed to it, so the decision matters more than many people realise.
Mileage allowance: simple but often conservative
The mileage method is the most commonly used approach particularly for sole traders and small businesses.
HMRC mileage rates:
- 45p per mile for the first 10,000 business miles
- 25p per mile for any miles above that
This rate is designed to cover everything including fuel insurance servicing repairs and general wear and tear, so if you use this, then you cannot claim for any other costs relating to the vehicle.
Why mileage is often recommended
Mileage is:
- Easy to understand
- Easy to record
- Quick to prepare at year end
From an admin perspective it is efficient. From a compliance perspective it is low risk. However that does not mean it accurately reflects what your vehicle actually costs you to run.
Actual vehicle expenses: more work but often more accurate
Claiming actual vehicle expenses means calculating the business use percentage of your vehicle and applying that percentage to your real costs and allowable costs can include:
- Fuel
- Insurance
- Servicing and repairs
- Road tax
- MOT
- Vehicle finance interest
- Capital allowances depending on the vehicle
If your vehicle costs are relatively high or your business mileage is significant this method can result in a higher claim than mileage. On the flip side if you have a relatively inexpensive car, then mileage can also be more beneficial.
Why this can be better for clients
Mileage rates are an average. They do not take into account:
- Rising fuel costs
- Higher insurance premiums
- More expensive vehicles
- Heavy business use
For many clients mileage is convenient but actual expenses are a more accurate reflection of what they are really spending.
The important catch: switching is limited
One of the most important things to understand is that you usually cannot switch freely between mileage and actual expenses for the same vehicle. Starting on mileage for simplicity can limit your options later even if your circumstances change. This is why it is important to look at the full picture before deciding.
Common issues we see
Some of the most common vehicle expense issues we see include:
- Being put on mileage without discussion
- Underclaiming because it feels safer
- Not realising actual expenses could be higher
- Choosing simplicity over accuracy without understanding the long term impact
Over time these decisions can affect cashflow more than people expect.
Our approach
At ClearSum we do not default to the easiest option. We look at:
- How the vehicle is actually used
- The true running costs
- The long term impact of the method chosen
- What is genuinely best for the client
Sometimes mileage is the right answer, sometimes it isn't. The key is making an informed decision rather than an automatic one.
Final thoughts
Vehicle expenses are one of those areas where a small decision can quietly become expensive. If you are unsure which method you are using whether it is still right for your business or whether you may be underclaiming it is worth reviewing it sooner rather than later.
If you would like help reviewing your vehicle expenses or getting some ongoing accounting support we are happy to help.
