Fixed Rate Deductions For Traders And Landlords – Worth Trying?

Sarah Bradford takes a look at the circumstances in which traders and landlords can claim fixed rate deductions.

The simplified expenses regime is designed to make life easier by allowing qualifying traders to calculate a deduction for certain business expenses by reference to flat rates, rather than deducting actual expenditure. This reduces the records that they need to keep. 

The ability to use mileage rates was extended to landlords operating an unincorporated property business and computing their profits on the cash basis from 6 April 2017.

Simplified expenses can be used by sole traders and partnerships, as long as the partnership does not have any corporate partners. The option to use simplified expenses is not available to companies. 

The simplified expenses regime provides the opportunity to use flat rates to calculate a deduction for the business cost of using vehicles, of working at home and of living in business premises. The flat rate option is only available to expenses falling into these categories – all other expense deductions must be worked out by reference to actual cost. 

Where a sole trader or partnership uses one or more vehicles for business journeys, a flat rate deduction can be claimed by reference to mileage rates, rather than claiming a deduction for the actual costs of running the vehicle, such as fuel costs, insurance, servicing, repairs, etc. However, mileage rates cannot be used to calculate the deduction if capital allowances have already been claimed in respect of the vehicle. 

Where simplified expenses are used, the flat rate per mile is as set out in the table below.

Cars and goods vehicles – first 10,000 business miles 45p

Cars and goods vehicles – business miles in excess of 

10,000 miles 25p

Motorcycles 24p

It is not necessary to use mileage rates to calculate the deduction for all vehicles. However, whatever basis is used for a particular vehicle must be used consistently while that vehicle is used for business. For example, simplified expenses could be used for a van, and a deduction based on actual costs could be claimed in respect of a car.

Trevor is a plumber, operating his business as a sole trader. He has a van that he uses for work and in the tax year in question he drove 16,432 business miles. He opts to claim a fixed mileage rate under the simplified expenses scheme in respect of the van, rather than a deduction for actual mileage costs. 

The permitted deduction is £6,108.

The calculation is: 10,000 miles at 45p per mile (£4,500) plus 6,432 miles at 25p per mile (£1,608).

A deduction for all other travel expenses, such as train or bus journeys can be claimed in addition to the fixed rate deduction, as can any parking costs incurred.

When deciding whether to opt for using simplified expenses in relation to a particular vehicle, compare the deduction under the simplified expenses rules with that available by reference to actual costs to see if it is worthwhile. HMRC produce a simplified expenses checker, which can be used for this purpose. It can be found on the Gov.uk website at www.gov.uk/simplified-expenses-checker.

Many small businesses are based at home, and the simplified expenses regime allows sole traders and qualifying partnerships to claim a fixed rate deduction for the costs of working from home. The deduction is based on the number of hours that the home is used for business each month. 

Using the fixed rate deduction saves the trader from having to apportion household bills to arrive at a reasonable deduction for office use of the home. There is no requirement to use the fixed rates – actual expenses can be deducted instead if this gives a better result (i.e. a higher deduction). 

The flat rate deduction under the simplified expenses regime can only be used where trader works from home for at least 25 hours per month. The amount of the deduction depends on the number of hours worked at home each month. This includes hours by any staff employed in the business.

25 to 50 £10

51 to 100 £18

101 or more £26

Finn is self-employed as a web designer. His business is based at home. Each month he works between 140 and 160 hours at home, with the exception of August, during which he worked 73 hours at home. 

Finn is able to claim the maximum deduction of £26 per month for every month, excluding August, and a deduction of £18 for August. This is equivalent to an annual deduction of £304 ((11 x £26) + (1 x £18)).

The deduction for working at home does not cover telephone calls, so an additional claim can be made for business calls by reference to an appropriate proportion of the bill. 

For some business, the business premises are also used as the proprietor’s home. Examples where this may be the case include guesthouses, bed and breakfast establishments, and small care homes. 

The simplified expenses regime can be used to work out the amount to disallow for personal use of the premises. This saves having to split the bills between business and personal use. The amount of the disallowance depends on the number of people living in the business premises as their home and is set as a monthly disallowance, as shown in the table below.

1 £350

2 £500

3 + £650

Paul and Louise run a bed and breakfast business and live in the business premises. The bed and breakfast is open for business all year round. Their annual premises expenses are £20,000. They claim a disallowance for the personal element using the fixed rate under the simplified expenses scheme. 

On the basis of two people living in the premises, the disallowance for personal use is £500 per month – an annual disallowance of £6,000.

The deduction that they are able to claim for premises costs is, therefore, £14,000 (being the actual costs of £20,000 less the fixed rate deduction for personal use of £6,000). 

Where someone only lives in the premises for part of the year, the disallowance only applies for the time that they are there. For example, where a child is at university during term time but at home during the holiday, the calculation would reflect the periods when they are at home.

The option for landlords to use mileage allowances to calculate the allowable deduction for motoring expenses, rather than working out the deduction based on actual costs, was announced at the time of the November 2017 Budget. The simplification is available both to landlords working their profit out on the cash basis (the default method from 6 April 2017) and to those using generally accepted accounting practice. The mileage rates available for landlords to use will be the same as those for traders under the simplified expenses rules, as set out above. 

As for traders, mileage allowances cannot be used for a vehicle for which capital allowances have already been claimed, although transitional rules will apply where capital allowances have been claimed in the period 2013/14 to 2016/17 and the landlord wishes to start claiming mileage allowances for the same vehicle from 2017/18. Mileage rates will also not be available where a deduction for the cost of acquiring the vehicle has been claimed under the cash basis.

Until April 2013, landlords were, by concession, able to claim mileage rates. Transitional rules will also apply to allow landlords the start using mileage rates again from 2017/18, without having to wait until a new vehicle is acquired. 

Claiming fixed rate deductions can save quite a lot of work, but a comparison should be made with actual costs to see if the fixed rate deduction is worthwhile. Where actual costs give a higher deduction, the trader or landlord will need to weigh up whether the higher deduction is worth the extra work, or whether it is just simpler to stick with fixed rate deductions.