Business expenses: a guide for limited companies
As the famous saying goes: ‘you’ve got to spend money to make money.’ That’s true now as it’s ever been, as businesses regularly rack up large costs to stimulate revenue. These expenses can be a minefield for inexperienced SME owners or directors of limited companies, who might be unsure which of those costs they can claim back from HMRC.
In this article, we will answer the following questions:
- What are allowable business expenses?
- What expenses count as allowable business expenses for limited companies?
- What expenses don’t count as allowable business expenses for limited companies?
- How should businesses record their expenses?
- How do you claim back expenses with HMRC?
What are allowable business expenses?
Allowable business expenses are costs which are wholly, exclusively and necessary during the everyday running of a company. These expenses are then deducted from a business’s trading profits, which is then used to calculate an organisation’s corporation tax.
For example, Company A has made £500,000 in the previous tax year, after paying its staff’s salaries and other expenses. However, it has also incurred £100,000 in allowable expenses during the same period. The company would therefore be required to pay corporation tax on the £400,000 of net profit.
As we mentioned above, these expenses can only be claimed when they have been made exclusively for the benefit of the company. For example, if a director has a phone which is only used for professional purposes half the time, only 50% of the bill can be claimed back as an expense.
These costs can be incurred through personal accounts or business accounts. It’s not uncommon for employees to pay for certain expenses such as stationary or office supplies out of pocket, before claiming the money back through the company. Most importantly, companies must be robust in tracking expenses, whether they are incurred directly or through employees.
What expenses count as allowable business expenses for limited companies?
The expenses listed here are some of the more common allowable expenses that are claimed each year. It is almost impossible to compile an exhaustive list.
Also note, these expenses are largely the same for any type of business that files its own accounts; be that a sole trader or a limited company. Please visit the government website to see which expenses are classified as allowable for self-employed people.
Limited companies are allowed to claim expenses for up to seven years before they register with Companies House. Startup founders often overlook this. If you’re slowly building towards starting your own business, make sure to keep the receipts for the following purchases or costs:
- computers and software
- web domain fees
- professional services e.g. lawyers or accountant fees
We’ve previously covered the insurance policies companies in the UK are required to hold. Luckily, this essential business cost is a tax deductible expense. Allowable policies include:
- public liability insurance
- employers’ liability insurance
- professional indemnity insurance
- contents insurance
Travel and accommodation expenses
As your business grows and you take on more clients, SME owners may need to make overnight business trips or journeys for meetings. The following costs can be claimed as allowable expenses:
- accommodation for trips with overnight stays
- food, drink and subsistence
- fuel mileage or tickets for public transport
With regards to travel, there are two important points to consider. You cannot claim the cost of travelling back and forth from your office to your permanent workplace for your commute. However, even short trips which are undertaken under personal cost can be claimed. For example, if you need to drive to your solicitor’s office, or drop money off at the bank, you can claim mileage.
If you have used your personal car or van to travel to a place of work, and you’ve paid out of pocket for the fuel, you can claim back these rates as limited company expenses. A company can also claim back the miles logged by cycling into work, but once again, bear in mind that commuting doesn’t count as an allowable expense. Please see the table below for the allowable rates:
|From tax year 2011/12 onwards
|First 10,000 business miles in the tax year
|Each business mile over 10,000 in the tax year
|Cars and vans
Costs relating to using your vehicle such as parking, road toll fees, congestion or low emission zone charges can also be claimed.
Whether your business has a central office, or you’re running your operation out of your home, you can claim back operational costs as allowable expenses.
For remote business owners, you can claim at a flat rate of £6 per week to cover utility expenses. Alternatively, you can work out a ‘fair usage’ rate: dividing the total amount of expenditure by the number of rooms used for business purposes, and the percentage of time those rooms are used for work purposes. You can claim for the following costs:
- energy and water
- internet and telephone bills
Note that self-employed people can claim for rent, mortgage, internet and telephone bills at the same rate as above, but as an employee of a limited company, you cannot claim for costs that would already be paid. HMRC refers to these expenditures as ‘fixed costs’.
You can also claim for costs incurred while working from home such as stationary, printing and postage.
For companies with a central office or premises your rental costs are an allowable expense. You can also claim back any commercial tax or business rates paid for the property too.
Professional equipment which is predominantly used for business purposes can be claimed. For example, if you buy a phone which is used 70% of the time for professional means, it would be allowable. Common equipment purchases may include:
- computers or phones
- company vehicles
- heavy machinery e.g. for agricultural or manufacturing businesses
- office furniture
Communication expenses can be claimed, however again, it becomes a murkier situation if the contract in question is used both for business and personal use.
If your phone contract is held in the company’s name, and is used solely for business purposes, the entirety of the bill can be claimed.
For personal contracts, you’ll need to separate business and personal use. As such, it’s good practice to log your usage, and work out a rough estimate of your habits, similar to the calculations for home office use. You can claim back business calls that have been made from a home landline too.
Directors of limited companies are expected to pay themselves a salary; these costs and your National Insurance Contributions can be claimed back as allowable expenses.
This is a tricky balance to get right, as there are a number of benefits to reducing your pay as an owner, paying yourself through dividends. However, this could significantly reduce your National Insurance contributions.
For advice on how much to pay yourself as a director, get in touch with Pennyhills today. We help growing businesses and their owners work out how to become more tax efficient, to the benefit of their personal and professional finances.
In the UK, a limited company is required to automatically enrol all eligible employees into a pension scheme, and make contributions to that pot.
These costs can be claimed back as allowable expenses. There is no limit to the amount an employer can pay into the fund, but these contributions must again pass HMRC’s test that the expenses are wholly and exclusively made for the benefit or running of the business.
Other common expenses
Professional development: Training courses can be claimed as limited company expenses. Any training has to be wholly and exclusively relevant to the needs of your trade or business. You can also claim for relevant reading materials such as trade magazines, business books, or subscriptions to newsletters.
Bank charges: Most business accounts require a fee to access better perks and service. Any costs incurred for the running of your business account can be claimed as an allowable expense.
Gifts, entertainment and trivial benefits: Costs incurred from treating your staff are generally classed as an allowable expense, however any cash incentive or benefit is taxable to the employee. For parties, there is a limit of £150 per person. Any entertainment provided to a client, even if it’s a genuine expense, isn’t allowable.
Advertising and marketing expenses: Promoting your business is obviously a necessary cost as you fight for clients; luckily, the cost of placing advertising be it PR, online, print or social media are allowable, either as a one-off or as an ongoing campaign
Donations to charity: Are you the giving type? Any donations you make to a registered charity are tax deductible, as long as there are no conditions made with the payment.
What expenses don’t count as allowable business expenses for limited companies?
We’ve touched briefly on expenditures which cannot be claimed, but it is worth stating again. Any expense which cannot pass the test of being wholly, exclusively and necessary to the running of the business are not allowable expenses. Here are some common examples of expenses which may be accidentally or incorrectly claimed:
- income paid as dividends, as opposed to a salary
- entertaining or giving gifts to clients
- fines – any costs incurred by violating a law cannot be claimed e.g. you can claim a legitimate parking expense, but if you have received a fine for the same trip you cannot claim that fee
- assets depreciating in value – the value of a company asset such as a car or property cannot be claimed if the asset is then sold
How should limited companies record their expenses?
There is no real right or wrong way to record business expenses, as long as two key criteria are met. That every expense incurred by the business is recorded in some way, and that relevant receipts are kept. This can stave off any scrutiny put on your expenses claims by HMRC, and also allow the company to accurately estimate its VAT liability.
For expenses which are paid out of pocket i.e. an employee of the company pays using their own money and then claims the funds back, most companies record monthly expenses, with employees filling out a form detailing the costs they have incurred over the previous period. Other costs incurred using company funds via a payment method like a company card are easier to track, as it will instantly create a record in your account and associated accounting software.
Our recommendation is to use the functionality provided by your accounting software to track expenses. For example, in Xero, individual employees can record their expenses, without gaining access to the rest of your account, allowing for a streamlined process without unnecessarily opening up the hood on the company’s finances.
How do you claim expenses with HMRC?
As part of filing your company’s tax return for the financial year, you will be required to provide a summary of your allowable expenses. You must keep hold of all relevant evidence these expenses incurred were wholly, exclusively and necessary to the running of the business.
The deadline for your tax return is nine months after the end of the financial year. You will be expected to pay your final corporation tax bill nine months and one day after the end of the previous financial tax year.
Nobody wants to pay more for their tax bill than is wholly necessary. Getting on top of your business expenses is vitally important to achieving tax efficiency. To find out how Pennyhills can help you achieve that goal, get in touch today.