Are you a self-employed individual? Do you have to travel on business, and does that travel ever entail an overnight stay away from your home?
Do you know exactly which of the travel and accommodation expenses you can legitimately claim back? If you get it wrong, you could pay too much tax, or worse still find yourself in trouble with HMRC for paying too little tax!
To help you get it right, here’s an explanation of the rules regarding travel and accommodation expenses for sole traders. It explains what you can, and can’t, include as legitimate costs in your business accounts.
1. Purpose of the journey
Firstly, whenever you’re looking at whether you can include costs for travel and accommodation as a business expense, you need to consider why you made the journey.
Was it just for business, such as to visit a client, or to pick up your new business cards?
Or was there a private element to the journey? For example, did you stop on your way home from a client meeting to do your weekly shop?
You need to establish what the primary purpose of the journey was. If this was mixed (i.e. for both business and personal purposes), then you need to look at whether you can split the business element from the private.
Let’s look at some examples;
Business journey: incidental private use
If your journey was primarily for business, and any private use of the journey was incidental, you can put the full cost of this travel into your business accounts.
Louise is an author. She travels by train from her home in London to visit her publisher in Portsmouth. While she is in Portsmouth she has a walk by the sea.
The purpose of Louise’s journey to Portsmouth was for business. The private element, her walk by the sea, was purely incidental. Louise claims the full cost of her train ticket in her accounts.
Mixed journey: different uses separable
If your journey included both business and private elements, but you can split out the private element, then you would include only the business cost in your accounts.
Keith is a business consultant. He lives in Manchester but has several clients who are based in London. He travels to London and stays there for two nights in order to attend meetings with his clients. He then decides to extend his stay to three nights so that he can see a West End show. Doing this costs him one night’s extra hotel bill and £50 in fees to change his train ticket.
The purpose of Keith’s journey was to visit his clients. He can claim the full cost of his train ticket but he cannot claim the £50 in fees to change the ticket, because he only had to do that in order to see the show, which is not a business expense.
He can also only claim two nights’ worth of hotel accommodation, not three, because the third night’s stay was for a personal purpose.
Mixed journey: no separation possible
If your journey is for mixed purposes, and you can’t split out the business and personal elements, then you can’t claim any of the cost of that journey.
Mary is a village hairdresser. She travels to her local town to bank her business takings and to do the weekly supermarket shop for her family. Because that journey was for mixed purposes, and because she can’t split the cost into business and private, Mary must not include any costs for this journey in her business accounts.
2. Use of your own car
When you are self-employed you will often travel in your own car on business.
If your business turnover is less than the annual VAT threshold (£85,000 from April 2020) you can include your business mileage in your accounts, at HMRC’s approved rates.
Otherwise, you’ll need to work out your car running costs and claim a percentage of them in your accounts, based on how much you used your car for business and how much was private. This means you have to track the mileage you traveled for all your journeys, so that you can work out the business use percentage of your car.
3. Method of transport
HMRC don’t require you to use the cheapest available method of transport – or even to claim only the amount that the cheapest method would have cost you. You can claim the full amount you spent on the journey.
Let’s take an example;
Maria is a self-employed accountant working in Edinburgh. She travels to London to visit a client.
To make this journey by overnight coach would cost her £30, to go by train would be £80 standard class or £150 first class, and to fly would cost her £75.
Maria decides to save time and fly.
She can claim the full £75. She’s not restricted to claiming only £30 because there would have been a cheaper way she could have reached London.
The main issue with travel and accommodation is to make sure you’re certain that the only costs you are including in your accounts are for business travel. If you are still in any doubt, you should seek professional advice from an accountant.
Emily Coltman FCA is Chief Accountant at online accounting pioneers FreeAgent, who provide an online accounting system specifically designed to meet the needs of freelancers and small businesses.