Limited companies can claim a wide range of business and business-related expenses. Knowing what all these expenses are and keeping track of them can be challenging, but failure to do so can result in a company paying more corporation tax than is necessary. In challenging economic times, it makes sense to ensure that you claim for every available expense to reduce your company tax bill and remain competitive.
This guide will outline limited company expenses, what you can claim, and the exclusions that may apply.
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Introduction to Limited Company Expenses
Any limited company in the UK can claim an extensive range of expenses against its profits to reduce its tax liability. This ensures that companies are only being taxed on their genuine profit rather than income which is reduced by the essential purchase of key items and services.
All limited companies need to ensure that they only claim for legitimate business expenses, which in practice means expenses that have been incurred either wholly or exclusively for the purpose of the business. In this guide, we’ll explore what this means in practice in greater detail.
Limited company expenses will frequently include items such as office rent, employee salaries, utility bills, travel expenses, and professional fees.
Expenses Rules for Business and Personal Use
One of the easiest ways for limited companies to fall foul of tax authorities is to mix up business and personal expenses. There are strict rules delineating what a business expense is and what is personal, and these should be adhered to when it comes to recording expenses.
What this means in practice is that:
- Each expense must be wholly and exclusively incurred for the purpose of the business
- The expense must be necessary and reasonable
- There should be supporting evidence for the expense, such as invoices, receipts, and bank statements
- The expense shouldn’t be a capital expense. This is an expense incurred to either purchase or improve an asset that will be used in the business for more than 12 months. This can be a complicated rule to understand, so, if necessary, seek advice from a tax professional for further clarification
- There are specific rules excluding certain expenditures from being claimed as expenses, including entertaining clients or company car use. Again, if you have any questions about a particular expense, it’s important to seek advice from a tax professional
Personal expenses are regarded as those expenses that are not wholly incurred for the benefit of the business, and they cannot be deducted from the company’s profits for tax purposes. In other words, if a personal expense is incurred while carrying out business activities, only the portion of the expense that relates entirely to the business can be claimed.
To help company directors and employees understand what is and is not an allowable expense, it can be helpful to set clear guidelines to follow in different scenarios.
Expenses You Can Claim as a Limited Company
The list of expenses you can claim as a limited company is extensive and often industry-specific. Here we provide a brief guide to some of the most common business expenses. It’s important to remember that this list is not exhaustive, and if there are any items not listed that you believe to be legitimate expenses, you should seek professional clarification.
Accountancy Fee Expenses
Hiring an accountant is an essential expense for limited companies, helping to ensure your finances are managed effectively and that you meet your compliance obligations. The costs of hiring an accountant or other professional services to manage your company finances, prepare your tax returns, help with financial planning, and offer advice all count as legitimate business expenses.
Advertising, Marketing & PR Expenses
The costs you incur marketing your business are legitimate business expenses. These can be significant and wide-ranging, including fees such as website hosting and maintenance, advertising budgets, SEO services, and marketing consultancy services.
Annual Event Expenses
Annual event expenses are legitimate business expenses. This might include the cost of hosting events such as a conference, product launch, or award ceremony that promotes the company’s products and services or helps to foster business relationships. This differs from taking out clients for lunch or after-work drinks, where the rules are more complicated.
Bank Charges, Credit Card Charges & Business Insurance Expenses
Businesses will incur charges to access essential financial services such as bank accounts, company credit cards, and business insurance. All of these are legitimate business expenses that can be declared. It’s important to remember that if a business credit card is used to make a personal purchase, such as buying lunch or transport that isn’t business related, then these are not allowable. For this reason, ensuring that business credit and current account cards are used strictly for business purposes is helpful.
Business Travel Expenses
Business travel expenses are those incurred by employees and directors when travelling purely to conduct work on behalf of the business. For instance, if someone travels to work overseas for the company for three days but decides to remain to explore the city for the rest of the week, only the three days they were working would be an allowable expense.
Travel expenses can cover several different elements, such as:
- Accommodation: If an employee or director must stay overnight to conduct business, attend a conference, or conclude a business-related event, their accommodation will be an allowable expense.
- Business Mileage: Mileage Allowance Payments (MAPs) or business mileage are what you pay your employee for using their own vehicle for business journeys. It’s again important to remember that business mileage refers only to the miles travelled on behalf of the business, and these need to be accurately recorded. If an employee travels five miles to see a client who is based on their usual route home, the remaining mileage to the employee’s home would not be allowable for tax purposes.
- Food & Drink (Subsistence): If someone is working away on behalf of the business, their food and drink, also known as subsistence, is an allowable expense.
- Parking: Parking fees that any director or employee incurs while working on company business are an allowable tax expense.
- Public Transport Costs: If public transport is used to attend to company business, then the cost of that public transport can be claimed as a legitimate business expense.
Business Entertaining Expenses
Business entertaining expenses can be a complex area and can be liable to challenge if not clear and straightforward. These are expenses that are incurred to help build and maintain a business relationship but must be reasonable and not excessive. They should be incurred purely for business reasons and not for personal enjoyment, and they must be directly related to the purpose of the business being carried out.
It is also worth noting that there are specific rules around entertaining customers or suppliers based overseas and rules around entertainment provided as part of a business conference or exhibition. To prevent confusion with business entertaining expenses, it’s essential to keep a complete record of how the money was spent and the people in attendance, along with why it was necessary. If you have any doubts, seek advice from your tax and financial adviser.
Employee expenses will frequently make up the most significant business expense. These expenses will include the cost of salaries, pensions, NI contributions, and any other benefits. The rules around employing people and taxation change frequently, so it’s important to work with a tax specialist to always ensure you comply with the latest tax regulations.
General Office Expenses
General office expenses are those incurred during the regular running of the company office. These are fairly straightforward to understand, with the largest expense usually being office rent and the ongoing cost of utilities. Other office-related expenses will include equipment such as computers and printers and furniture such as desks, chairs, and filing cabinets. Less obvious expenses include the cost of insurance, cleaning, and maintenance, as well as charges incurred for sending and receiving business-related parcels and letters.
Home Office Allowance
The home office allowance allows a portion of household expenses to be claimed as a business expense if the business is conducted from home. To claim the expense, part of the home must be used as the company office. This might be a room or garden office, but it must be used exclusively for business purposes. A portion of the household expenses relating to that room or space can then be claimed as a business expense, such as heating, lighting, and internet costs.
To determine the level of home office allowance, the percentage of the home used for company purposes must be established. If, for instance, the property has five rooms and one room is used for the company, then a fifth of the related household expenses could be claimed as a business expense. Again, this is a potentially complex area that is likely to require experienced financial advice.
Internet & Mobile Phone Expenses
The cost of internet and mobile phone for purely business purposes are allowed as a business expense.
The cost of software and any licences and subscriptions for software solely used for business purposes is a legitimate business tax expense. This might include accounting or project management tools.
- Computer/Laptop: The cost of purchasing or hiring any computing equipment used solely for business purposes can be claimed as a business tax expense. This applies to software purchased or hired for employees to use when working remotely, but clear guidelines need to be established that ensure any equipment is only used for work purposes.
- Other Necessary Software: Any other software that may be required during the course of the business, such as security packages, can also be claimed as a business expense.
Training Cost Expenses
Any training undertaken by employees or organised by the company for employees is a legitimate business expense. Again, it’s important to remember that any training must be related to the company’s activities and cannot be purely for personal development.
Trivial benefits are small gifts such as a bottle of wine, a voucher, flowers, or a box of chocolates given to employees to celebrate a particular milestone or as a goodwill gesture. If these are small and proportionate, they can be claimed as legitimate business expenses.
How to Keep a Record of Limited Company Expenses
Thorough record-keeping is all-important for ensuring compliance with tax laws and regulations. If you want to claim for expenses and ensure that you don’t fall foul of HMRC later, it’s essential that you maintain accurate records for all of your allowable expenses. It’s also critical in the event of your company being audited.
In practice, this means good housekeeping and setting up appropriate systems for recording expenses.
What should you do to ensure that you are keeping accurate records of your limited company expenses?
- Keep receipts and invoices: Receipts and invoices are essential records of your business expenses. Not only should you keep your receipts and invoices, but you also need to ensure that your records are accessible and well-organised.
- Consider using accounting software: Most limited companies will benefit from using accounting software to manage company finances. Accounting software will usually contain tools that enable you to keep track of your expenses alongside other valuable tools that simplify record-keeping and filing tax returns.
- Ensure that personal and business expenses are separated: It’s very important that you only claim for business expenses to avoid potential confusion. You should only claim for legitimate expenses that you are confident have been incurred purely for business purposes.
- Generate expense reports: Expense reports provide the details of each expense. This includes the purpose of the expenditure, the amount, and the date the expenditure was incurred. These should be clearly set out, easy to access, and can provide a clear record for tax purposes. They can also help companies monitor their expenditure and find areas where savings might be made.
- Review expense records: Your expense records and reports should be reviewed regularly to ensure they are accurate and identify potential discrepancies. This ensures that any developing issues are identified early and before they can become significant issues.
Thorough record-keeping and a strict approach to expenses are essential and can save you time and effort at a later stage. Failure to keep proper records can prove costly, so getting it right is important. By keeping detailed records of all your genuine business expenses and ensuring your financial records are organised, you can legally reduce your tax liability while remaining compliant with tax laws and regulations.
How to Claim Expenses as a Limited Company
It’s very important to fully understand what expenses can be claimed before submitting your claim. Once all eligible expenses have been identified, they can be submitted as part of the company’s tax return. This is either completed online or via the post. If you have an accountant, they can ensure your tax return is completed accurately and promptly. Record keeping is essential to help them make your claim accurate. Your accountant will be able to advise the best ways to make their task easier while ensuring maximum accuracy.
How to Treat Employee Expenses
Employee expenses can be complicated and can lead to disputes without clear guidelines. As with all business expenses, the importance of accurate record-keeping cannot be overstated.
Establishing a clear policy can make it easier to manage employee expenses. Clear guidelines should exist on what is and isn’t a legitimate business expense and the documentation required to support any expenses claim. Employee expenses should be reported on the company payroll and included in the company’s accounts.
Ensuring you claim the total amount of tax relief you are due for business expenses is part of running a successful limited company. To do this, you need to understand what a legitimate expense is and isn’t, establish clear guidelines for expense claims, and ensure that you keep accurate records.
In most cases, working with an accountant, financial adviser, or tax specialist will be essential for maximising your business tax allowances and ensuring that you are compliant.
For further advice and information regarding limited company expenses and how DS Burge & Co can help ensure you maximise your allowance, get in touch today.