What can a limited company claim as expenses to reduce tax payable

Business profit is sales less costs and expenses. For the purpose of this blog we will refer to “expenses” to cover both costs and expenses.

Making sure you include all allowable expenses means you will pay less tax.

You also need to include all business expenses in your accounts because you need to understand how much money your business makes, without including all the costs this will not be measurable.

Note that if you include expenses that are later found not be a business expense, Her Majesty’s Revenue and Customs (HMRC) can disregard them and claim unpaid corporation tax and interest. They may also apply a penalty of up to 100% of the unpaid tax, depending on the circumstances.

The fundamental rules

When it comes to claiming business expenses for your limited company there are several rules you need to follow:

· You can only claim for expenses that you incur for a business reason – HMRC call this “wholly, exclusively and necessarily" for the purpose of the business

· You can claim only the business part of combined expenses. So, if you mix business and pleasure, but can apportion the cost, you can claim the business portion as an expense. If you are reasonable with the split this will be allowed. Also, if the personal element is incidental you can claim all as a business expense. For example, if you are in London for client visits and pop into a museum for an hour for a break, you can treat this museum visit as incidental and claim the full costs of travel as a business expense

· Business expenses may be paid through your company’s bank account, or you can reclaim the costs of business expenses paid by you. To do this you would make an expense claim and the company would pay you back the cost

· The majority of limited company expenses can reduce the tax you pay – although there are some exceptions, for example entertaining customers. We will look into this later

· Pre formation and running costs, for example miles driven for business reasons, can be claimed but like any other expense you will need to have receipts and records of expenses

Expenses by category

Here are the elements of Profit:

Sales

Less Cost of Sales

= Gross profit

Less Administration costs

= Net Profit

Lets look at the categories that make each of these expenses up.

Cost of Sales

Purchases – these are the goods you buy to resell

Increases/decreases in stocks – for example if you write off stock because it is old and unsaleable

Courier and postage – the cost of getting the products to your customers

Discounts – these can be considered an expense or can be deducted from the sales figure

Commission payable – if you pay commission to an online platform, for example ebay, this is a business cost

Hire of plant and machinery – if you need to hire any equipment you can claim as a business expense

Administration Costs

Employees and sub-contractors

Wages and salaries – ie employee costs - wages are paid weekly and salaries are paid monthly – all are business expenses

Directors salaries – these are also salaries, but useful to track them separately as they need to be shown separately in the accounts at the end of the year

Sub-contractor costs – many small businesses hire contractors instead of employing staff and these are business expenses

Pensions – if you pay pensions for yourself or your staff these can be claimed as a business expense – in addition those paid to yourself are tax free withdrawals from the company – indeed a tax rebate may be available but seek advice as the rules are complicated

Bonuses – any staff bonuses whether regular or ad hoc

Employers National Insurance – when you pay staff over a certain amount (2020/21 £9,500) you will need to pay 13.8% as National Insurance which can be included as a business expense (but there is a £4,000 allowance for small businesses)

Temporary staff – you may need to hire staff to cover for staff off ill or at busy times

Recruiting – the cost of hiring staff, eg agency fees or hiring of a room to interview

Staff training and welfare – if you pay for yourself or staff to undertake training that is relative to their role this can be claimed. Also training on health and safety is allowable

Health check and eye test expenses

If your employees use computer screens as a big part of their job, then they can claim eye tests as limited company expenses. The cost of prescription glasses or contact lenses can also be claimed as business expenses but only if they’re used strictly for screen-based work as part of their employment.

Also allowed is one health check a year.

Mileage – if you use your own vehicle for work purposes you can treat this as a business cost – for a car the amount to charge is 45p per mile – see all rates here

make a claim say once a month and the company can pay you back. This does not apply to any travel to/from home and work however

Cars and Vans – a company can purchase a car or a van and claim part of the cost each year as a deduction to profit. This deduction is know as a ‘writing down allowance’. If the car is used for personal travel there the employee or director will need to pay income tax and National Insurance – the rules are complex and you should seek advice before proceeding

Travel and subsistence – other than travel to and from your regular place(s) of work, you can claim costs of travel such as train fares, hotels, meals, etc.

Entertaining – this breaks down into two types:

Entertaining customers/clients – although this should be recorded as a business expense, so that you can understand the true cost of running your business, it cannot be used to reduce the corporation tax you pay

Entertaining staff – whether it is a Christmas or summer party, the costs of entertaining your employees can be claimed as a business expense as long as it is an annual event, open to all staff members and costs less than £150 per person

Gifts, entertainment and trivial benefits

You don’t need to pay tax and National Insurance or let HMRC know about a gift or benefit for your employee (otherwise 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

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

Premises

Rent – all rent for offices or warehouses

Rates – rates are payable for commercial properties – you cannot claim Council Tax if working from home

Service charges – for example payable for the maintenance of shared spaces at an office site

Light and heat – all utility bills if in an office or warehouse – see the use of home rules below if working from home

Cleaning – cleaning of any business property

Use of home – you can expense any equipment needed for an employee to work from home – as well as £18 a month to cover additional utility costs

Administration

Phone – if the mobile phone contract is in the company name all costs will be business expenses – if personal use is incidental. If the contract is in your own name you can claim the business call costs only and not part of the monthly rental fee – this applies to a landline phone also.

Internet – like the phone – if a shared home/business connection in your own name the costs and not allowable as a business expense – if a dedicated line for an office this is allowable

Postage and courier – incidental postage and courier costs – if sending products sold would be classed as Cost of Sale (see above) - but all are allowable

Stationery and printing – costs of buying stationery or printing supplies, and the cost of outsourced prinitng

Books, magazines, journals – if they relate to the business purpose

Subscriptions – again if relevant to the business purpose eg member of the photographic society for a photographer

Bank charges – all charges from the bank other than interest – interest is also allowable but should be recorded separately (for purposes of raising funds) – see below

Factoring charges – factoring is a form of fundraising where you receive funds in advance of being paid by customers – the charge for this service is a business expense

Insurance – if business related eg office contents, public and employee liability, professional indemnity, etc

Equipment expensed – small businesses can include all equipment as a business expense to offset against tax (claimed via a “Annual Investment Allowance” (AIA) – in the accounts the treatment may be different. See “Depreciation” below. Office furniture such as desks and chairs are allowable if used only in an office set up

Equipment hire – eg if you need to hire a printer for the office temporarily for a certain job, or if you hire equipment to complete a garden landscape project

Software – any costs of online software are business expenses if used solely for the business – for example Xero online accounting software or Wix the website builder. If you have internet security at home in your own name this is not an allowable business expense

Repairs and maintenance – any repairs or maintenance of the office or office equipment eg having the office window mended or the printer in the office repaired

Depreciation – higher value equipment is treated as an asset and the value of the asset reduced over the life of the asset. Eg I buy an industrial printer for £5,000 and believe it will last me 5 years. The yearly cost will be £1,000 and this is the business expense. For tax the whole £5,000 is treated as allowable – see “Equipment expensed” above

Bad debts – if a customer cannot or does not pay an invoice you can claim this as a business expense (or reduce revenue if you agreed to credit them)

Donations – charitable donations are allowed as a business expense

Loss on foreign exchange – if you deal with customers abroad any loss incurred when exchanging currency is a business expense

Sundry – anything you believe is an allowable business expense should be classed as “Sundry” so that your accountant can review and advise.

Legal and Professional

Accounting fees – any charges your accountant makes and filing fees

Solicitors/legal fees – eg preparing employee contracts

Consultancy fees – for example if you have a consultant in to advise on business strategy

Advertising, marketing and Public relations – whether for online or direct marketing purposes, regular or ad hoc

Interest

For all the below the agreement would need to be in the name of the business

Bank loans

Other loans

Credit cards

Finance leases and Hire Purchase

If the agreement is not in the company name the costs would not be allowable – the director would need to set up a separate agreement with the company and the interest charged would then be allowable against business profits (however be aware there are rules regarding directors and loans)

Making a loss

A last word on business expenses - note that if by claiming business expenses your business makes a loss, you can usually carry forward that loss and offset it against any profit made in the future – so it always pays to keep accurate and complete records.

Nobody wants to pay more tax than they have to, so keep up to date with your record keeping so that you claim all the expenses possible.

Get in touch if you’re unsure whether to claim an expense to reduce your company tax bill.