Self-Employed expenses - vehicles

I use the flat rate of 45p/mile for business miles in my private car. This was always useful when my taxable net profits were above the personal allowance in any one tax year as it helped to reduce the amount of tax I was to pay. In the last few years, however, my business has been scaled down a bit and I am now consistently generating net profits well under the personal allowance and consequently am not liable for any income tax. I am still putting through a monthly purchase order to ‘record’ the cost in the p&l account on nominal 7400 (travelling). Ultimately, there seems little point in doing this as it will not serve to reduce my tax liability - do I still have to do it as a paper exercise? Whichever way you look at it, I have to stand the cost of fuel etc for the use of my private car for business miles - correct?

Hello @gardenman_2803

For queries such as this it may be worth checking with your accountant for professional advice, just to be on the safe side.

I will leave this post open for now as we do have some accountants in the community who may comment with advice.

Hello @gardenman_2803 - I’m not an accountant, but I can think of two possible reasons to carry on recording this:
(a) if you decide to grow your business again you don’t run the risk of suspicion of a sudden cost
(b) if you decide to sell your business as a going concern client list to another business, they may be interested in the viability and costs are part of that.

If you happen to end up making losses from your trade, you can carry those forward to offset profits of future years and thus reduce the tax payable, so I would carry on recording it. It is an expense you incur so you should really record it as such, although of course you don’t have to claim it - the choice is yours! But your accounts won’t really show the true cost of the business without it.

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Thank you to those who have replied so far. Still a bit confused on this one…
If I can consider some real data, for a moment. In the 21/22 tax year, I did (in round figures) 1350 business miles in my private car. If we say I get 35 miles to the gallon, then that’s 38.6 gallons of fuel at an average price (over the period Apr21 to Mar22 and sourced from RAC foundation)) of £6.46/gallon. So, in reality, I have shelled out £249 out of my own money to fund these journeys. (OK, I know that sole trader businesses are not separate legal entities but I like to notionally treat mine as stand-alone). In terms of book entries, my p&l for the full 21/22 year shows £607.50 (1350 x £0.45) against nominal 7400 (travelling) - under allowable expenses.
Can I not just create a book entry at the end of the year to show the business paying me back the £249 and show that against nominal 7400? I would transfer £249 from my business current account to my private bank account.

As you say, the £249 you spent on fuel was your own money, not that of the business - your fuel purchases are not a business expense because you’re using the 45p/mile rate rather than charging the real costs to the business. If the business “pays you back” for that £249 then that’s simply you taking £249 of drawings, it doesn’t affect any of the P&L nominal codes.

When you put the £607.50 debit onto 7400 where did you put the balancing credit entry? Presumably somewhere on your balance sheet, typically the drawings bank account, to show that the business “owes” that £607 to you. If you then “pay yourself back” £249 that would be a transfer from the business current account to the same drawings account, offsetting some of that liability.

I have always followed the Quickfile guide on this, i.e.

  1. Set up a new supplier entitled ‘Expenses: Approved Mileage’

  2. Logged a new purchase order under this supplier and ticked it as fully paid, stating that funds are taken from Proprietors Drawings Account (1202) via a bank transfer. (as Credit entries). The nominal code used is 7400 (travelling).

  3. Go into 1202 and raise a journal to Dr 1202 and Cr 3100 (proprietor or partner drawings). The affect of the Cr entry is to show the amounts as ‘incoming’.

  4. The net effect is to show the amount in the expenses section of the P&L acc, thus reducing the taxable profit for tax purposes. In reality, no money has physically left the business.

I think it’s an either/or situation. I either carry on doing as above or have the business ‘pay me back’ at the end of an accounting period. If I go for the latter, then the book entries for this ‘payback’ of £249 would be Cr bank. Dr 7400 (travelling) - correct?

No. You’re doing the right thing already to get the mileage allowance to show in your P&L, with the balancing entry showing as “money out” on 1202 at your step 2 above. If you then wish to actually take “reimbursement” for the petrol costs this is just another kind of drawings - bank transfer £249 from current account to 1202 - reducing the amount that you need to journal across from 3100 at step 3.

Whether or not you take the £249 doesn’t affect 7400, that’s already showing the full mileage allowance as a deductible business expense. The £249 is purely a balance sheet exercise.

Thanks, Ian. Almost follow you here. So just to check: over the full year (and after the year-end close, nominal 7400 (travelling) would show all the monthly amounts as Dr entries, with the year-end journal clearing these to zero. Prop Drawings Account (1202) would show monthly amounts as Credit entries (i.e. the ‘payments’). There would be the monthly journals to Dr 1202 and Cr 3100 (prop or partner drawings) - as in step 2 on my notes - and so balance would be zero. If I take the reimbursement and tfr £249 from the business current account to my private bank account, then this would be a Cr entry in biz current account and a Dr entry in 1202, thus leaving a balance brought down of £249 in 1202 - yes? What happens to that? Do I journal that to Credit 1202 and Dr 3100?

Personally I wouldn’t bother with the monthly journals, I just use 1202 throughout the year to record all movements of money between my personal funds and the business, then just clear the final balance over to 3100 in one go at year end. Say I took £1000 a month of actual drawings, so each month there’s £1000 bank transfer from 1200 to 1202. I process £600 of mileage allowances, but I take only £200 of that actually out of the business as “reimbursement” for fuel. Then at year end my 1202 balance is 12,000 drawings minus 600 mileage allowance plus 200 taken as fuel costs = £11,600, and I journal that total over to 3100 to reset the balance for next year.

The net effect is the same if you do it your way - the total that goes to 3100 across the year is still the amount you’ve taken out of the business through the year (debit) minus the amount you’ve put in (credit).

(Yes, if you register the mileage allowance in P&L but don’t take the money out then you have effectively “put money in” to the business - the allowance is supposed to account for all your costs of using the vehicle for business including fuel, maintenance and depreciation)

My scenario is the same as yours where you take the £200, whereas I take the £249. So a reimbursement would be a bank transfer from 1200 to 1202. So that’s Cr bank, Dr 1202. Then do a journal to Cr 1202 and Dr 3100. Or, more efficiently, I could create a new ‘outgoing’ transaction in 1200 for £249, tag it to ‘something else not on this list’ and post to nominal 3100 (Prop or partner drawings). Does that sound right? I would still process the monthly mileage allowances as per my earlier post.

That sounds right to me.