Revenue and Customs Brief 14 (2013): Direct Tax - simpler Income Tax - simplified expenses
Published 2 July 2013
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Purpose of this brief
To announce the withdrawal of non-statutory ‘business mileage’ deductions and agreements for ‘board and lodging’ private use adjustments, now superseded by the ‘simplified expenses’ rules as part of ‘simpler income tax for small businesses’ legislation.
To set out transitional arrangements for the withdrawal of ‘board and lodging’ agreements.
To explain how businesses can use the ‘simplified expenses’ rules for business mileage, ‘board and lodging’ private use adjustments and flat rate adjustment for use of home.
Who should read this brief
All sole traders and business partnerships (and their advisers) that need to be aware of rules on:
- ‘Business mileage’ deductions
- ‘Board and lodging’ private use adjustments
- ‘Use of home for business’ deductions
‘Business mileage’ deductions
Background
A non-statutory mileage rate scheme was previously available to small businesses, which allowed a deduction for business mileage to be computed using the ‘Approved Mileage Allowance Payments (AMAP)’ rates applicable under employment income rules.
With effect for the tax year 2013 to 2014 onwards, we are withdrawing this non-statutory scheme as the simplified expenses rules now provide a statutory basis to allow deductions for expenditure on motor vehicles to be computed using a similar, simple method. The new rules apply to all sole traders and business partnerships and provide relief for the costs of buying, maintaining and running the vehicles.
Simplified expenses: expenditure on motor vehicles
Under the ‘simplified expenses’ rules, businesses can calculate allowable expenditure on vehicles using a flat rate based on mileage. This means that actual costs incurred do not need to be recorded, nor do capital allowances need to be calculated.
Businesses can choose to use the flat rates. However, once the flat rate has been used in relation to a particular vehicle, this method of calculation must continue to be used for as long as the vehicle remains in the business. If capital allowances have already been claimed in respect of a particular vehicle, then the flat rate cannot be claimed in respect of that vehicle.
Where the ‘simplified expenses’ rules are not used, allowable expenses and capital allowances are calculated in the normal way unless the business has opted to use the cash basis, in which case capital allowances are only used for cars.
The rates per mile that can be claimed under the flat rate scheme are shown in the table below.
| Vehicle | Flat rate per mile with simplified expenses |
|---|---|
| Cars and goods vehicles first 10,000 miles | 45p |
| Cars and goods vehicles after 10,000 miles | 25p |
| Motorcycles | 24p |
‘Board and Lodging’ private use adjustments
Background
Historically, some HM Revenue and Customs (HMRC) offices have entered into ‘board and lodging’ agreements with small hotel and guest house businesses. These provided a practical basis for agreeing private use adjustments in respect of use of the premises by the proprietor(s) and their family.
HMRC are withdrawing these agreements because:
- all businesses currently using such an agreement will be able to use the ‘simplified expenses’ rules instead, and
- this will provide a statutory method for calculating private use adjustments on a simple, fair and consistent basis
Simplified expenses: premises used both for business and private purposes
Where business premises are used partly for private purposes as a home, under the ‘simplified expenses’ rules, businesses can choose to make a private use adjustment based on a flat rate amount. This amount is subtracted from actual expenses incurred to arrive at the amount deductible as a business expense.
Only premises used mainly for the purposes of carrying on a trade will qualify.
The flat rate amount is based on how many people (including children) use the business premises each month or part of a month as a private home. The flat rate includes all household goods and services, food and non-alcoholic drinks and utilities. It does not include mortgage interest, rent of the premises, council tax or rates. A reasonable apportionment of these expenses should be made based on the extent of the private occupation of the premises.
The flat rates are as follows:
| Number of people | Flat rate per month |
|---|---|
| 1 | £350 |
| 2 | £500 |
| 3 or more | £650 |
The use of the ‘simplified expenses’ method for private use of business premises is entirely optional. If the ‘simplified expenses’ rules are not used, the private use adjustment should be made under the normal statutory basis in which case records will need to be kept in order to make accurate adjustments.
Transitional arrangements for withdrawal of ‘Board and Lodging’ Agreements
All ‘board and lodging’ agreements are withdrawn with effect from the 2013 to 2014 tax year and no business can use them for the first time for the 2013 to 2014 tax year.
We recognise, however, that some businesses currently using these agreements may need more time to prepare for the change, particularly in cases where the business opts not to use the ‘simplified expenses’ method and needs to maintain full records.
As such, for the 2013 to 2014 tax year only, any business which has used a previous agreement with HMRC for the 2012 to 2013 tax year can also use it for the 2013 to 2014 tax year, as an alternative to either the ‘simplified expenses’ method or the normal statutory basis.
‘Use of home for business’ deductions
Simplified expenses: use of home for business
The ‘simplified expenses’ rules also allow sole traders and business partnerships to claim a flat rate deduction in respect of ‘use of home for business’ as an alternative method to recording actual expenditure and apportioning the business element.
The monthly flat rate includes all household running costs, such as heat, light, power, telephone and broadband/internet costs.
The rates are as follows:
| Number of hours worked | Flat rate per month |
|---|---|
| 25 or more | £10 |
| 51 or more | £18 |
| 101 or more | £26 |
Businesses can choose whether or not to use the ‘simplified expenses rules’ applying to ‘use of home for business’. If these rules are not used, businesses will need to use the normal statutory method instead.
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.
Further information
To find out more about ‘simpler income tax for small businesses’, (including simplified expenses for business use of home) follow the links below:
HMRC Technical Note published on 28 March 2013
Simpler Income Tax: simplified expenses
2 July 2013