What business expenses can I claim as a Limited Company?
Are you an experienced hand at running a limited company, or are you taking your first steps as a company director? No matter where you are in your journey, there's a good chance that you're letting some business expenses slip through the cracks, which could end up costing you more in taxes than necessary. We've crafted this article to guide you in unlocking the full potential of tax relief available to you.
Why should you care about your business expenses?
Corporation Tax is a tax your company pays on its profit. By increasing your business expenses, you reduce your company’s profit, therefore reducing your Corporation Tax bill.
It's important to keep in mind that, in general, expenses should be 'wholly, exclusively, and necessary' for business purposes. However, dealing with HMRC rules can sometimes feel like navigating a maze, with concepts like 'fairness' and 'reasonableness' playing a role.
In this article, we'll walk you through the primary types of HMRC-approved business expenses that you, as a limited company, can claim for tax purposes.
To ensure you stay on the right side of HMRC, it's crucial that you only claim expenses that are on their approved list.
HMRC's rules regarding tax-deductible expenses can sometimes resemble a labyrinth, often hinging on concepts like 'fairness' and 'reasonableness'.
Managing your expenses effectively requires meticulous record-keeping, we will discuss this further below.
Did you know that there are 2 ways to incur business expenses?
There are 2 types of business expenses you will incur:
Direct business expenses - where directly pay for these expenses using the company's business bank account, or
Out-of-pocket expenses - where you foot the bill with your personal bank account or credit card and then get reimbursed by the company.
Generally speaking, 99% of your expenses should be direct.
It may be tempting to pay for everything on a personal credit card where you might be able to claim points, air miles or other rewards and then reimburse yourself from your Limited Company, this is not recommended. HMRC will not look favourably at this approach due to the potential scope for errors or fraud.
What sort of record-keeping is expected of you?
Receipts must be kept for all purchases, and for six years after you have filed your tax return for a given year, as HMRC could decide to investigate at any point within this time.
Most of my clients are set up on accounting software such as FreeAgent. Within most accounting software packages you have the option to attach receipts/ purchase invoices to specific bank transactions. This is a surefire way to make sure that your record-keeping is in perfect order.
On some occasions where you do not have a receipt or purchase invoice, HMRC will accept a bank statement as proof if you misplace a receipt.
What expenses are allowable within a limited company?
When it comes to claiming business expenses for your limited company, there are two key rules to follow:
You can only claim for the expenses you incur wholly and exclusively during the everyday running of your business, although sometimes the line is blurred, such as when you work from home.
You cannot claim for expenses that have a dual purpose for business and personal use. The exception to this is mobile phones, computer equipment, and vehicles.
If you are ever unsure about whether something would qualify as a business expense please reach out with your specific circumstances and I’d be more than happy to offer advice.
Check out the list below for some of the more common allowable expenses, click on each item to find out more information!
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This one is self-explanatory!
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When travelling for business purposes, provided it is reasonable and not excessive, no 5-star hotels, sorry!
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This may be a one-off cost or an ongoing charge as long as the service is exclusively for your business.
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Such as professional indemnity insurance, public liability insurance or specific equipment insurance.
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Such as leasing agreements or hire purchases, the finance agreements or bank accounts must be in the name of the limited company. Any interest costs on loans are also allowable.
However, if the finance agreements are in your personal name rather than the limited company they are not allowable.
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if you use a personal car, van, motorbike or even your bicycle to get to/ from a client’s workplace you can submit a mileage claim to your limited company, allowing you to withdraw money from the company without incurring any personal taxes, and you will also reduce your corporation tax bill at the same time!
https://support.freeagent.com/hc/en-gb/articles/115001223124-How-to-record-a-new-mileage-claim
You can claim 45 pence, 24 pence and 20 pence per mile for a car, motorbike or bicycle for the first 10,000 miles in a year. After this, a reduced rate applies to cars only.
The rate decreases from 45 pence to 25 pence per mile.
Note that ‘cars’ include vans.
Remember you must not buy fuel or other maintenance costs with your business bank account for a personal vehicle.
The 45 pence per mile that you claim on your car covers both the fuel cost and general wear of driving your personal vehicle for that mile, hence you do not buy fuel with the company bank account, or you are putting the cost through the business twice.
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Your company will pay less corporation tax on charitable donations. Keep records of the donation.
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Your company can host 1 annual event, most commonly a Christmas party.
You may invite a partner, and the maximum allowable cost per person is £150 per person. The event must cater mostly for staff.
One director and a plus one would be acceptable and give you a budget of £300.
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Only if it is wholly, exclusively and necessary for the performance of your work, for example, a uniform, protective clothing, and costumes (for actors or entertainers) it is allowable.
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Eye tests are an allowable expense against corporation tax for employees or directors.
However, this is only the case when someone uses a display screen equipment (DSE) for at least one hour per day.
DSE are devices or equipment that have an alphanumeric or graphic display screen and include display screens, laptops, touch screens and other similar devices.
Glasses are an allowable expense, but only if they are specifically prescribed for work purposes. If you then used them for personal use as well then unfortunately it would be hard to justify the expense to HMRC.
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As long as they’re entirely for business use, items such as laptops, PCs, business phones and furniture for an office can be recorded as a fixed asset in your company accounts.
It is worth noting that the purchase of fixed assets does not reduce company profits, but you receive capital allowances at 100% of the asset value (in most cases) to reduce the amount of Corporation Tax paid by your company.
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If you are travelling for business purposes, then food and drink is an allowable expense.
Examples include travelling to a client’s workplace, attending conferences, and spending overnight away from home.
These expenses are also known as subsistence expenses. These expenses are necessary expenses while travelling for exclusively business purposes.
However, you cannot claim food and drink costs where they are part of your normal commute to a fixed workplace.
The costs must be reasonable, and cannot be lavish in nature.
Note that any food and drink costs spent whilst entertaining a client are not allowable for corporation tax purposes.
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You can gift up to £300 per year to employees but it must not be cash. But it must not exceed £50 per gift.
Examples could include gift cards (not redeemable for physical cash), or a physical gift of any type.
This is known as a ‘trivial benefit’. You don’t need to pay tax or National Insurance or let HMRC know about the gift.
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As long as they are directly related to your business, legal fees and other professional fees are allowable.
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Medical insurance expenses are allowable, however, you must notify your accountant as it will need to be treated as a Benefit In Kind (BIK) through payroll.
You will personally pay income tax on the value of the benefit, and the company will pay national insurance on it.
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Make sure that the contracts are in the limited company name, otherwise, HMRC may argue that it is used for personal use.
The duality of use may mean the expense is disallowed.
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The cost of anything necessary and essential for your duties as a director is allowable.
This covers computer equipment, printers, software, postage, stationery, cloud storage or other subscriptions.
You may also claim reasonable relief towards the cost of equipping/ furnishing an office, e.g. chairs, bookcases and so on.
This may appear to hold a dual purpose, but it’s allowed because it is a consequence of a business need. As long as the personal use is insignificant.
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Pension payments through the limited company are allowable and are generally more efficient than contributing to your pension with personal funds.
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Professional subscriptions such as memberships to trade bodies or anything directly relevant to your employment are allowable.
A membership to the local sports club is now allowable unless you are a professional athlete.
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Renting your home office to your business.
This is a complicated one so please get in touch if you’d like some more information.
In almost all cases it will work out more tax efficient than the work-from-home allowance discussed below.
I will request the following pieces of information so you can start compiling - the rental cost of the home, service charge, ground rent, utility bills, council tax bill, broadband + landline costs, property insurance, cleaning, and any other ongoing house costs (note that mortgage interest + capital repayments are excluded).
In addition please confirm the number of rooms in the house (excluding bathrooms, kitchens, hallways).
And finally, you will need to confirm the amount of time spent working from home in a year. For example 7 hours a day, over 260 working days in the year.
Note that whilst your company would now incur this rental expense, on the flip side, you as a person would now have rental income.
However, the rental income would not result in any personal tax because you would not have generated a rental profit.
If we had calculated £1,000 of rental income by calculating a fair proportion of genuine allowable property costs then you would have a corresponding expense of the same value. Hence it nets to nil, no profit.
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Salaries paid to employees or directors reduce your corporation tax bill.
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Subcontractors or agencies are allowable expenses.
Do you occasionally hire freelancers or others to help out with your workload?
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Training courses for business purposes or continued professional development.
However, note that HMRC often disallows expenses for courses such as MBAs as they offer new skills and knowledge rather than building on existing skills in your industry.
You must be able to justify the business relevance in improving existing skills.
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The travel should not be ‘ordinary commuting’. HMRC defines a commute as the journey you make between your home and permanent workplace.
Travel costs for work travel. Examples include parking costs, trains, buses, airfares, taxis, or vehicle rental.
This is one of the few occasions it is acceptable to purchase fuel through the company bank account. You do not submit a mileage claim for a vehicle rental, instead, you would pay for all directly related costs through the business bank account.
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Purchasing a Car through your Limited Company
The tax treatment of the purchase costs depends on how the vehicle is financed. If a loan is taken out to purchase the vehicle or the vehicle is purchased on Hire Purchase, only the interest payments are an allowable company expense. Your company is also able to claim Capital Allowances to gain relief for the cost of the vehicle, which reduces the company’s taxable profit.
If the vehicle is leased so your limited company does not own it, the monthly lease payments can be claimed by your limited company as a business expense. However, there is a flat rate disallowance of 15% of relevant payments and applies only to cars with CO2 emissions above 50g/km. This means 15% of the expense is not allowable for tax purposes.
Regardless of how the vehicle is purchased the use, or availability to use the vehicle, will create a taxable Benefit in Kind on you as an individual. This is calculated as a percentage of the market list price of the car, based on the CO2 emissions. The list price is calculated as the market list price of the car when new, not the price you pay for the car, together with any extras added to the car. Some dealers sell new cars for less than the nationally recognised list price so you should be aware of this when making the purchase.
Purchasing a Van through your Limited Company
Vans are classified as plant and machinery for tax purposes. As such they qualify for 100% allowances under the Annual Investment Allowance regime. This means you get a deduction for 100% of the cost to reduce your company’s taxable profits.
There is a BIK that will need to be declared on your personal tax return if it is used regularly for private use. There is also an additional benefit if the company pays for all fuel.
Where there is an “insignificant” level of private use HMRC acknowledges that there is no benefit arising and these amounts do not apply.
Insignificant private use would be classed as, for example, stopping at the dentist on the way home from an assignment. Using a van to do the weekly shopping would not qualify as insignificant private use. If there is an insignificant level of private use there are substantial tax benefits in utilising a company van compared to a vehicle with high CO2 emissions.
Ongoing vehicle costs
If the vehicle is in the name of the company all associated running costs, including fuel, insurance, car tax, repairs and maintenance will be purchased through the company bank account and are allowable for corporation tax purposes.
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You can claim £6/ week as an out-of-pocket expense from your limited company, this equates to £312 per year and is supposed to cover any associated additional costs by working from home.
You can still separately purchase office equipment through the business.
It is often more tax-efficient to rent your home office back to your limited company.
Bear in mind that this list is not exhaustive. If you aren’t sure about a particular purchase, then reach out and I can provide some guidance.
Now that we have covered most of the allowable expenses. There are certain expenses that you are not allowed to deduct from your company profit.
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If you own a car or van and it has been purchased under your name rather than the limited company you cannot put any expenses through the limited company. This includes fuel, insurance, repairs and maintenance, mot, and car tax.
You are instead allowed to claim mileage expenses. Check out the mileage info in the list of allowable expenses above.
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This includes personal trainers too.
Depending on which accountant you ask you may get a slightly different answer here.
The consensus is that no it is not allowable for corporation tax purposes.
And it would also represent a Benefit in Kind (BIK). Meaning it would need to be declared as income on your personal tax return.
The gym membership cost would now turn into income on your self-assessment tax return, where you will now pay either 20%, 40% or 45% on this income.
This will end up being less tax efficient in most circumstances as you would have been better off withdrawing the money as dividends, paying the lower dividend tax rate and then paying for the gym membership yourself.
In addition to this, the limited company will need to pay national insurance on the benefit at 13.8%.
There is however an exception to all of this, and that is if you happen to be a professional athlete, or you are a personal trainer, or in a position of work where being at a certain level of fitness is a requirement of the work.
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It would be very difficult to prove to HMRC that standard driving lessons for a car were wholly and exclusively for business purposes.
In almost all cases there will be an element of personal use.
However, if you were taking a specific driving course that was in relation to your business then this would be allowable. Examples include lorry driving, becoming a driving instructor, and towing a trailer behind a car if required for work.
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Any form of fines or penalty charges are not allowable for corporation tax purposes.
For example late filing of tax returns or financial statements, or vehicular offences (speeding tickets, parking tickets).
If you’ve found this useful, or have any questions off of the back of this article please email me at hello@floewa.com.