Claiming tax allowances for buying or leasing a vehicle when you’re a sole trader

Many self-employed people couldn’t operate their sole trader business if they didn’t have a vehicle. Some sole traders use their own car, van or motorbike, for which they can choose to calculate and claim actual expenses or use simplified expenses in the form of the mileage allowance.

Your own vehicle may not be suitable for business or you might not even own one, so you need to buy or lease a car, van or motorbike. Alternatively, you may need to buy or lease another vehicle to keep pace with business growth. If you’re considering buying or leasing a car, van or motorbike for your sole trader business, here are some key points you should know about claiming tax allowances.

Buying cars

If you use traditional accounting (ie where you record income and expenses by the date you invoiced or were billed) and buy a car for your business, you can claim this as a capital allowance, so you can deduct some of the value from your profits before you pay tax.

• The CO2 emissions of the car and the date you bought it determine how much capital allowance you can claim.
• Government website GOV.uk explains what capital allowances you can claim for different types of cars bought since April 2021 (as well as cars bought between April 2018 and April 2021).
• If you’re a sole trader or ordinary partner and use the car for business and personal reasons, you’ll also need to calculate your claim based on the proportion of business use.

If you use cash-basis accounting (ie where you record income and expenses by the date you were paid or paid expenses) and buy a car for your business, you can only claim this as a capital allowance if you’re not using simplified expenses (ie the mileage allowance).

Need to know!

• For capital allowance purposes, HMRC classes a car as a vehicle that’s suitable for private use or that most people use privately, one that was not built for transporting goods. A motorhome is classed as a car for capital allowance purposes.

How to claim capital allowances

Sole traders claim for capital allowances via their Self Assessment tax return (SA100). You must claim in the accounting period you bought the car if you want to claim the full value under first year allowances [these enable you to claim for up to 100 per cent of the cost of certain qualifying items against your business profits in the year of purchase].

“If you do not want to claim the full value, you can claim part of it using writing down allowances. You can do this at any time as long as you still own the [vehicle].”

You cannot claim annual investment allowance (AIA) on cars; claim writing down allowances instead. Writing down allowances enable you to deduct a percentage of the value of an item from your profits each year. For business cars, the rate depends on their CO2 emissions.

Buying other types of vehicle

For all other types of vehicle purchases, including vans, you claim an allowable expense (ie which HMRC allows you to deduct from your earnings via Self Assessment with other expenses to arrive at your taxable profit).

And because they’re not cars, you can claim annual investment allowance (AIA) on motorbikes, lorries, vans and trucks. You can deduct the full value of a non-car vehicle from your profits before tax. If you sell the motorbike, lorry, van or truck after claiming AIA, you may need to pay tax.

Leasing a car or van

Leasing or hiring a car is tax deductible, but CO2 emissions should be considered when choosing a vehicle to lease. As explained by HMRC: “In some cases, if you lease or hire a car you cannot claim all of the hire charges or rental payments. For example, if you leased a car on or after 6 April 2020 and the CO2 emissions are more than 110g/km, you must disallow 15% of the hire charge or rental cost.”

When speaking to car dealers or vehicle leasing companies, ask them about the tax implications of the vehicle’s CO2 emissions. If you use a leased or hire vehicle for personal use, you cannot claim this proportion as an allowable expense.

Need to know!

• Once you return your lease car, additional mileage and wear-and-tear costs are either wholly or partly tax deductible, dependent on whether you use the lease car wholly or partly for business.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.