How do expenses work for a limited company?

How do expenses work for a limited company?

Whether you are a long-term director of a limited company, a start-up or you are considering switching from being a sole trader to a limited company, understanding what business costs are classed as allowable business expenses for limited companies is something you should understand.

The general rule with expenses for limited companies is that the expense must be “wholly, exclusively and necessary” for business purposes. If business expenses go unclaimed then you may be paying more corporation tax than you need to.

In this blog, we'll cover the main HMRC approved business expenses that you can claim as a limited company, however it is worth seeking professional advice.

 

What does an allowable business expense mean?

Allowable expenses are tax-deductible, meaning HMRC allows you to offset those expenses against your annual corporation tax bill.

 

The rules for limited company business expenses

There are a number of rules to bear in mind when considering what will be classed as a tax-deductible expense.

1. You can only claim for the costs you incur wholly and exclusively for setting up and running your business.

2. You can’t claim for expenses that have a dual purpose for business and personal use. For example, if you decide to extend a business trip for leisure, you can only claim for the business days, not the additional days.

3. Business expenses can be paid through your company’s bank account, or you can reclaim the costs of business expenses paid by you and later reimbursed via your company.

4. Most company expenses can be offset against your company’s corporation tax liability. However, there are some exceptions, read more below.

5. Keeping accurate records of start-up, pre-formation costs and running costs, including invoices and VAT receipts are crucial in case of queries or investigation by HMRC in future.

 

What expenses can you put through a limited company?

Bank charges

The bank fees for your business bank accounts, including credit card and loan interest, can be claimed as business expenses.

Use of home as office

If you use your home to run your business, then you can claim a percentage of your household costs and utility bills as business expenses. You can claim a flat rate of  £6 per week or work out which rooms you use for your business needs and the time they are used for business purposes and charge a proportion of your bills.

Business insurance

You can claim the cost of any business insurance policies including public liability insurance, employers' liability, professional indemnity insurance and business contents insurance.

Phone bills

Work phone/mobile contracts and broadband costs can count as a limited company expense. If your mobile phone contract is in your company’s name, you can claim the entire bill as a business expense. If you make business calls from a home phone line, you can claim for these.

Equipment and office costs

Business equipment such as computers, software, printers, scanners and photocopiers can be claimed. Also, items such as office furniture, like chairs, desks, storage units qualify as business assets if they are used wholly for business purposes. Office costs such as stationery computer consumables and postage can also be claimed.

Professional subscriptions and memberships

Items such as industry specific magazine subscriptions and books can be claimed as a company expense where they are associated with the trading activities of the company

You may be able to claim for professional membership fees but only if it can be shown to provide a clear benefit to the business. HMRC say “you can reclaim tax you pay on fees or subscriptions to some approved professional organisations – but only if you must have membership to do your job or it’s helpful for your work.” This only applies if the professional or trade association’s name appears on HMRC’s List of ‘professional bodies approved for tax relief.’ You can check out the HMRC approved list here.

Professional fees

Professional fees may be incurred for a variety of reasons and can include fees charged by accountants, lawyers, architects, or other consultants. Many professional fees are allowable as a tax-deductible cost but some may be capital in nature.

Advertising, marketing and PR expenses

Advertising, marketing and PR can be critical to most businesses. Whether it is a one-off or ongoing cost, if the investment is to promote your business, then this can be claimed.

Professional development expenses

Personal development and professional training courses qualify as a business expense. You can also claim travel and accommodation while attending a training course

HMRC often won't allow expenses for courses like MBAs, as they offer new skills and knowledge rather than building on existing skills. They may be allowed if you demonstrate that they are reinforcing/improving your existing knowledge/skills.

Travel expenses

Travel expenses can be claimed as limited company expenses if the travel is necessary for work purposes. (This doesn’t include the everyday commute between your home and permanent workplace.)

If you use your personal car or van to travel to a temporary place of work and you’ve paid for the fuel yourself, you can claim the following rates as limited company expenses:

• Car and vans – 45p per mile for the first 10,000 miles and 25p for every mile thereafter.

• Motorcyclists – 24p per mile

• Bicycle – 20p per mile

You can also claim other travel related expenses such as:

• Parking costs

• Road toll fees

• Congestion charges

• Food and drink

• Accommodation costs

• Public transport costs

Gifts, entertainment and trivial benefits

You don’t need to notify HMRC, or pay tax and National Insurance for a gift or benefit for your employees (known as a trivial benefit) if the following rules apply:

• It’s not set out in the terms of their contract.

• It’s not a reward for their performance or work.

• It isn’t cash or a cash voucher.

• It cost you £50 or less to provide for each occasion.

If you offer employees gifts or benefits that don’t meet all the criteria above, then you will need to pay tax on them.

Entertainment expenses

Business entertainment isn’t an allowable expense against profits. However, if you do spend your own money on business entertainment as part of your duties as a limited company director, you may be able to claim it as a business expense.

Just bear in mind that these business entertainment costs would be disallowed in the company profits, giving you the same result as not claiming in the first place.

Other expenses

There is a myriad of other expenses you can claim such as:

• Health check and eye test costs.

• Childcare expenses.

• Annual staff party expenses up to £150 per person.

• Start-up costs to form and begin to run your business can be claimed up to seven years before the company started trading.

• Pension contributions - be aware of a £60,000 limit (subject to certain restrictions) to what you pay in tax-free

Keeping records of limited company business expenses

You need to ensure accurate record keeping for all business expenses. HMRC could query or investigate expense claims. Keep copies of all relevant receipts and claims.

If employees are claiming back expenses, then it may be worth investing in expense management software. There are many of types of expense management software on the market to simplify the expense reimbursement and reconciliation process. The software provides facilities for expense report creation, submission, approval, reimbursement, and accounting.

How to claim expenses as a limited company

You can pay your limited company’s expenses directly from your business account or if you pay for something personally, your company can reimburse the expense to you. You should set clear guidelines for any employees you have and ensure they collect VAT receipts for any expenses they claim.

Conclusion

All businesses have costs associated with setting up and day-to-day running of the company. Whether it's stationery, phone bills, computer software, or travel costs. Being able to claim tax relief on these costs via business expenses, helps make your business more tax efficient.

As a limited company owner, by knowing which are tax deductible expenses, you ensure your company is tax efficient. This is achieved by lowering your company's tax bill by reducing your profit and Corporation Tax payment.

If you need help and advice on what allowable expenses your limited company can and can't claim, contact us today at our offices In Chester, Wirral and Liverpool.