First examine the facts as they exist in the current
financial year 2007-08. The current approved mileage
allowances were set five years ago in the financial year
2002-03 and while the current rates in no way reflect the
increases in fuel costs in recent years that all businesses
including small business. The Inland Revenue is actually
considering a revised scale of tax allowances that may even
lower the overall amount that can be claimed which will be
detrimental to small business.
The approved mileage allowance for cars and vans is 40p per
mile for the first 10,000 business miles and 25p per mile
for each business mile over 10,000 miles in each tax year.
The approved mileage allowance for motor cycles is 24p per
mile for the first 10,000 business miles and 24p per mile
for each business mile over 10,000 miles in each tax year.
The approved mileage allowance for bicycles is 20p per mile
for the first 10,000 business miles and 20p per mile for
each business mile over 10,000 miles in each tax year.
These approved mileage allowances demonstrate complete
irrelevance to the actual costs incurred in performing the
business journey. The purchase price of a new motor vehicle
would not be unusually 100 times the price of a bicycle,
plus vehicle maintenance costs, vehicle insurance, licence
fees and substantial fuel charges in operating the motor
vehicle compared with zero costs for a bicycle. Few small
businesses claim tax allowances for bicycle business
journeys in their small business accounts.
The startling anomaly is that vehicle allowances are only
twice the bicycle rate on the first 10,000 miles and only
25% more over 10,000 miles. Not that many people are likely
to use a bicycle and cover in excess of 10,000 business
miles in a single tax year.
In addition to the approved mileage allowances an
additional 5p per business mile may also be claimed as a
tax free expense if a fellow passenger is also carried on
the business journey in the small business accounting
records. That fellow passenger must also be on a work
journey to enable the mileage allowance to be claimed in
the small business accounts
Generally there are specific rules on justifying a business
journey and the information that must be supplied to
support the claim for a tax free mileage allowance. In
practise the Inland Revenue often take a reasonable view of
any claims provided the information provided in the small
business accounts indicates that the claim is valid and has
been incurred for real business journeys as opposed to an
invention by the claimant.
When claiming a mileage allowance the essential information
to provide is the date of the journey, the reason for that
journey, the place visited and the actual mileage covered.
Small businesses who claim this tax free allowance should
maintain detailed records as part of the small business
accounting to substantiate their expense claim should it
later be challenged by the tax authority. Devising an
expense sheet and submitting this sheet to the business is
one way of ensuring sufficient documentation exists.
Another way a small business can substantiate a mileage
allowance expense claim is to enter each journey directly
into the accounts for small businesses, perhaps recording
the mileage against either sales invoices to customers or
against purchase invoices from suppliers. With these
transactions having already been recorded in the small
business accounting records with a date, the location also
stated on the invoice and the purpose of the journey being
obvious the rules on supporting information are covered.
That is the easy part of making a valid claim but for many
small businesses making such claims would seriously
understate the true level of business journeys. Therefore
also include in the small business accounts all other
business journeys undertaken which may or may not have
resulted in a specific purchase or a specific sale.
So what other journeys can the small business accounting
system claim as a deductible expense against the taxable
profit. The answer is basically any business journey and
that should include all incidental journeys, perhaps
visiting a supplier or a customer, visiting customers to
quote for work, attending a business meeting, taking money
to the bank.
Mileage allowances cannot be claimed for a business vehicle
where the running costs of that vehicle are being claimed
as a deduction from net taxable profits. Vehicle running
costs include the capital tax allowances, licence fees,
insurance, repairs and maintenance, membership of breakdown
services and fuel costs.
Many small businesses may find that more than one vehicle
is used for business journeys. The business vehicle running
costs may be claimed for a specific business vehicle on
which mileage allowances are not claimed this tax
allowances may be claimed for the use of a private vehicle
in the small business accounts.
Perhaps the small business runs a van for its main business
and the running costs exceed the potential mileage
allowance in which case the business should claim the
vehicle running costs. If a different private vehicle is
also used for some business journeys, perhaps even a spouse
taking cheques to the bank, then mileage allowances could
be claimed for that journey. Each business should examine
their tax allowance practises to ensure the maximum tax
free allowance is claimed and supported with the required
documentation to lower the tax burden when preparing the
small business accounts.
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Terry Cartwright designs Small Business Accounting Software
at http://www.diyaccounting.co.uk/ on excel spreadsheets
providing complete Bookkeeping Spreadsheet solutions at
http://www.diyaccounting.co.uk/bookkeeping.htm
for small
to medium sized businesses
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