The Finance Bill received Royal Assent on 17th July 2013 and, amongst the many changes, is the introduction of the use of fixed rate expense adjustments for most unincorporated businesses. This is the first time (unless anyone can tell me otherwise) that statute has allowed a fixed rate deduction to be used instead of actual costs for the calculation of business income tax liabilities. Yes, we have had a non-statutory mileage rate scheme for businesses under the VAT threshold but now any size of unincorporated business can use them. So even partners in accountancy firms can use fixed rates for their cars and use of home (unless you have gone after the tax advantages of incorporating your business or having a corporate partner).
Most attention will perhaps be the use of the flat rate for business mileage for cars for those clients whose turnover is above the VAT registration threshold. The decision to use flat rates for the car must be made before capital allowances are claimed. Key considerations will be:
• expected mileage on business;• how much depreciation in value do you expect to suffer;• how many miles per gallon is achieved in the car;• how much will the garage sting you for servicing.
The important point is that the rates given are not dependent on the value and fuel efficiency of the car. I can see partners getting out their calculators even as I write this blog....
When it comes to the use of home for business, many may consider the flat rates are not particularly generous particularly as the rate, according to HMRC, is for all household running costs, including telephone and broadband/internet costs. This may encourage some to want to go through the bother of intricate calculations of the number of rooms used in the home for business and business use proportions. A useful statement in the HMRC brief on the fixed rate expenses was:
'If a business does not wish to use the simplified expenses for business use of home, then where private use of telephone/internet costs does not form a significant proportion of the service use, we will accept that the full amount of expenditure can be claimed.'
The use of fixed rates is optional and so your clients will need your help in deciding whether to use these rates. The statutory flat rates are operable for 2013/14 not 2012/13 and so a decision can be made next year. I would suggest however that it is better to let your clients know now. Knowledge of the rates may affect a decision to buy a replacement car and it will affect the type of business records that should be kept.
Returning to the title of this blog - 'Fixed rate expenses for the self employed - it's now legal' - I know some of you will be saying you have used fixed rates for years, particularly for the use of the home for business. Well you may have, but it wasn't tax law!