Many business owners know their business expenses, but in the same breath, many are also unsure of the exact list of allowable expenses. Limited company owners often face confusion when it comes to knowing their allowable business expenses as there are grey areas between what can and can’t be claimed for tax relief.
As a loose rule of thumb, the cost of any goods or services which have been used for business purposes will be classed as tax deductible expenses and will reduce the business profits meaning less tax needs to be paid.
However, there are things to be aware of that HMRC absolutely refutes as an allowable business expense, even if a limited company owner might see them as a necessity, like any childcare fees paid while attending a meeting.
To make business owners lives a little easier, we’ve compiled a list of limited company expenses that business owners may be able to claim for their organisation. This will give an indication of the types of things that can and can’t be claimed, but it’s important to remember that this is not an exhaustive list and does not cover every single business expense – it’s just a pretty good start!
What are allowable business expenses for limited companies?
To recap, allowable business expenses are defined by HMRC as those that are “wholly necessary and ordinary” for conducting business. These include things like business-related travel expenses, office supplies and equipment, and employee salaries. Basically, anything that is needed to keep your business running is considered an allowable expense.
Allowable expenses will reduce your businesses profits, which in turn reduces the amount you pay for your Corporation tax bill.
However, expenses which have a ‘duality of purpose’, i.e. expenses which have a personal and business element, are not generally allowable. For example, smart work clothes bought specifically for client meetings will not be classified as a business expense because they have a duality of purpose (they provide basic human needs like warmth). On the other hand, a high vis vest or protective wear would class as a business expense because it would be used solely for working purposes.
Additionally, some expenses may also require special documentation in order to be deducted, and some come with a ‘benefit of kind‘ charge. For example, if your business pays for anything that is used exclusively by employees for their own pleasure, it will be subject to a “benefit in kind” Employers National Insurance Contributions fee of 15.05 percent, plus income taxes paid by the employee.
However, as long as you keep accurate records of your expenses, you should be able to take advantage of all the deductions to which you’re entitled.
It’s also worth keeping in mind that just because you don’t pay tax on allowable expenses, it doesn’t mean they don’t matter when determining your monthly profit – so keep an eye out for items that might lead to excessive costs before they grow out of control.
List of Allowable Expenses: Limited Company Edition
Typically, your company will pay for the majority of the expenses listed below. On some occasions, you may need to finance business costs personally (like a stay of accommodation) and be reimbursed later by your limited company.
If you do have any queries or concerns over what constitutes a legitimate (tax-deductible) cost, we strongly advise consulting with an accountant who specialises in tax relief.
Accounting and legal fees
Many business owners are surprised to learn that accounting and legal fees are considered business expenses. After all, these are services that are used to support the business, not the product or service that the business sells.
However, there are a few reasons why these fees fall under business expenses. First, accounting and legal fees help to keep the business organised and compliant with the law. This is essential for protecting the business from liability and ensuring that it can continue to operate smoothly. Second, accounting and legal fees can be deducted from business taxes, which also helps to save the business a significant amount of money each year.
Accommodation
When you are on a business trip, accommodation is one of the necessary expenses that you will incur. It is important to remember that business expenses are tax-deductible, so you should always keep receipts for business-related accommodation costs. If you are paying for accommodation out of your own pocket, you can usually expense the cost of the trip to the company – just keep full documentation.
Advertising, Marketing, PR
Advertising and marketing costs are business expenses because they are necessary to promote and sell products or services. Without advertising, potential customers would not be aware of the business or its offerings. Marketing is also essential to create a positive perception of the business and to build customer loyalty. The expenses of marketing your business mostly refer to the costs associated with printing and producing physical materials, purchasing advertising spaces in print and on-screen media and travel expenses.
Annual Staff Events
Whether it’s a Christmas party or a weekend of team building, businesses can claim tax relief on any annual staff events that they hold, as long as the cost per attendee isn’t more than £150 including VAT.
Broadband
You might be surprised, but yes, businesses can claim expenses on their internet access. The broadband contract itself does need to be in the name of the limited company however, otherwise it will be judged as too difficult to split between business and personal use.
Bad debts
Bad debts are business expenses because they are money that is owed to a business but cannot be collected. When a business extends credit to a customer, there is always the risk that the customer will not pay the debt. If this happens, the business must write off the debt as a bad debt. Bad debts are a tax deductible expense, which means they can be used to reduce the amount of taxes a business owes. This makes them an important part of many businesses’ financial planning. While no business likes to have bad debts, they are sometimes inevitable and by understanding how bad debts work, businesses can minimise their impact and keep their finances healthy.
Business Gifts
You can deduct the costs of company gifts up to £50 per person per tax year. This must be a genuine business gift that promotes, or relates to, your business usually with a conspicuous advertisement and not simply just food, alcohol, or tobacco.
Business insurance
Business insurance is classed as an allowable business expense, which means that the premiums you pay for your business insurance can be deducted from your taxes. There are a few different types of business insurance, and each one provides coverage for different risks.
For example, property insurance covers damage to your business property, while liability insurance covers claims made against your business by third parties. By having adequate coverage, you can protect your business from financial losses due to accidents, natural disasters, or other unforeseen events and claim the cost of paying for it.
Business mileage
You can deduct the standard mileage rates levied by HMRC if you drive your own car for business purposes. The current standard rate is 45p per mile (first 10,000 miles), and then 25p each mile after that. Motorbikes are taxed at 24 pence per mile, whereas bicycles are charged 20 pence per mile.
Charity donations and sponsorship
You can support a team or donate to a charity through your business and usually these amounts will be considered to be “business expenses” we say usually, because if you’re donating £1000 to your daughters netball team then there may be a problem with duality of purpose.
However, on the whole they are deductible from your Corporation Tax liability. So, if you decide to sponsor a team or something comparable where your company gets something in return (such as exposure), those expenditures can be recorded as business expenses.
Childcare costs
As mentioned above, childcare is not considered a taxable business expenditure, but staff can seek tax relief for childcare needs up to a certain amount each month.
Employees may receive £243, £124, or £110 in tax relief each month on their childcare expenses according to their tax band (minimal, basic, higher or additional).
However, in order to qualify for tax relief, they must produce childcare vouchers from an approved provider.
Clothing
As also mentioned in the beginning of our blog, clothing can fall under the legitimate business expenses you can claim, but it has to relate to work.
Protective equipment expenses, such as hard hats, high visibility vests, or steel capped boots are all examples of workplace clothing that are deductible for corporation tax.
Computer / Internet Software
Computer software is another overlooked allowable business expense. Computer software is classed as a business response because it helps to improve the efficiency of a business and can be used for a number of different purposes.
Software can be used for cloud accounting for example, as well as inventory management, customer relationship management, and much more which helps a business to run more smoothly and efficiently. As a result, the cost of the software can be deducted from the business’s taxes, saving the business a significant amount of money in the long run.
Depreciation of Assets
Depreciation of assets is a business expense that is often overlooked. However, depreciation can have a significant impact on a business’s bottom line.
Depreciation is the process of assigning a portion of the cost of an asset to each year of its useful life. For example, if a company buys a piece of equipment for £1,000 and it has a useful life of 10 years, the company will depreciate the asset by £100 each year. Depreciation is used to reflect the declining value of an asset over time. However, depreciation, whilst a business expense that reduces the company profit is not deductible for tax purposes.
Instead, for tax purposes, you get relief for fixed assets like equipment through capital allowances which we explain in detail below.
Employers’ National Insurance
Unsurprisingly, when businesses pay national insurance contributions on employees’ wages, these expenses are eligible for tax relief. This payroll tax applies to salaries at a rate of 15.05 percent above the current Class 1 threshold.
Equipment Expenses
Claiming business expenses to offset the cost of any major equipment purchases is also allowed. Equipment costs mostly relate to things like heavy machinery, vital tools, or specialised vehicles.
As we’ve already seen, these types of equipment expenses are referred to as capital allowances because capital assets are things that you will keep and use in the business – like machinery, plant and vehicles. Under the The Annual Investment Allowance (AIA), businesses can spend up to £1 million a year on new capital assets and then deduct those costs from their overall taxable profits.
Eye Tests
A little known allowable business expense in the UK is the price of eye tests. Under Health & Safety legislation eye tests for directors and employees can be paid for by the business where there is a requirement to use display screen equipment for one hour or more on a daily basis.
The cost of glasses or contact lenses can also be claimed, but only if they’re used exclusively for screen-related activities at work and you must have proof from your optician.
Food & Drink
In most cases, food and drink is considered a business expense but whether it is allowable for tax purposes depends on whether it is for staff or clients. If you’re entertaining clients or potential customers, you may see food and drink as part of building a positive relationship, or signing a deal. However, client entertainment is not a deductible business expense. On the other hand, staff entertainment usually is allowable for tax purposes.
Interest on business loans
Most business loans come with an annual percentage rate (APR) that includes both the interest rate and any fees charged by the lender. The interest portion of the APR is what we typically think of as the “cost of borrowing money.” But did you know that the interest you pay on business loans is actually a business expense? That’s right, HMRC views business loan interest as a deductible business expense, which can save you money come tax time.
For income tax purposes, the repayment of the capital element of a loan is not deductible. However, interest paid on loans to a company will be a deductible expense if the loan was granted entirely and exclusively for business purposes.
So not only does business loan interest help to keep your business afloat, it can also help you to lower your taxes!
Life and Income Protection Insurance
It may come as a surprise to you, but one of the benefits of a limited company is that by purchasing a life insurance policy through the company, you could save up to 50% on the cost of coverage. That’s because the premiums are paid by your company.
You can also deduct the cost of an executive income protection plan against your Corporation Tax bill, although the payments (should you make a claim) will be taxable.
Office Costs
Rent, utilities, and any other associated costs are all deductible if your organisation leases premises.
If you have a home office, a proportion of your household expenses can be claimed (based on the number of rooms in the property and how much time you spend in the office area).
From April 2020 you can claim a fixed £6/week for home office costs too, without the need to provide any proof of receipts.
Pension Contributions
Pension contributions are an allowable business expense because they are a form of deferred compensation. By setting aside money now, companies can ensure that their employees will have a steady income stream in retirement.
Pension contributions also offer tax advantages for both companies and employees. For businesses, pension contributions are deductible from taxable income. For employees, pension contributions are not subject to income taxes until they are withdrawn in retirement.
Phone costs
Most businesses rely on some form of telephone communication, whether it’s for customer service or internal communication. And while the cost of phone service may seem like a small expense, it can add up quickly. That’s why many businesses choose to write off the cost of phone service as an allowable business expense.
By classifying the cost of phone service as an allowable business expense, businesses can deduct a portion of their telecom expenses from their taxes. This can help to offset some of the costs of running a business and make it more affordable in the long run. So if you’re wondering whether or not you should write off your business’s phone costs, the answer is probably yes!
However, if the phone contract is in the name of the limited company, all costs are allowable. If it’s not, only the cost of individual business calls will be reclaimable.
Pre-Trading Costs
If there were costs incurred before establishing your limited company, you are eligible to claim genuine expenditures of up to seven years prior to the creation of your company.
You can also claim back the VAT you have paid on legal purchases if you register for VAT, but the timeframes are shorter – up to 6 months for services and up to 4 years for stock, assets, and goods.
Professional fees
Professional fees are the expenses of employing specialists to assist with various aspects of running your business, such as a small business accountant or solicitors. This wide umbrella term also includes the cost of any other firm on a business-to-business contract.
Professional Memberships and Subscriptions
You can claim for memberships, as long as they are on HMRC’s prescribed list.
Any professional, or industry level memberships or subscription fees can be claimed as limited company business expenses provided the institution is on HMRC’s approved list.
It’s also often overlooked, but businesses can deduct the cost of subscribing to trade magazines and journals, too.
Salaries / Wages
Salaries are of course offset against a Corporation Tax Bill because they are a necessary part of running a business. Without employees, a business would not be able to function. Salaries allow businesses to attract and retain qualified employees who can contribute to the success of the business. In addition, salaries are generally tax-deductible, which can help to reduce the overall cost of running a business. For these reasons, salaries are an important and allowable business expense.
Training Courses
Training costs are tax-deductible so long as the training program’s content is directly related to your business (for example, if you’re a marketing director, an industry certification).
Travel Expenses
The cost of any sort of business travel is a legitimate expense. You may also deduct the fees for traffic congestion, tolls, and parking expenses.
However, if you’re a contractor and spend more than 24 months at a temporary workplace, then costs beyond that time period are no longer classed as allowable business expenses – so ensure you have a financial agreement in place that explains what happens beyond a 24 month period (if necessary).
‘Trivial Benefits’
You can provide small perks to employees, such as £50 in value at a time (and no more), without having to label them as “in-kind benefits.” A hamper, wine or chocolates are just a few examples.
As a company director, you can only spend up to £300 each year under new regulations implemented in April 2016 however.
To wrap up
Thanks for sticking with us! We know it’s a lot of information to take in but at Raw Accounting we are here to help you. At Raw Accounting we can help work out your expenses to keep you tax efficient. We’ll take a look at your business and what you’re trying to achieve, then provide expert advice on the best way to manage your finances – including allowable business expenses.
So, if you need our in-house experts who can help to steer you in the right direction and save you money come tax time, or if you have any questions about allowable business expenses or anything else tax related, just get in touch.
