Limited company allowable expenses: The good, the bad and the tax-deductible
When it comes sorting out your limited company allowable expenses, it’s easy to stick your head in the sand, avoid it at all costs and just add what you think is ‘reasonable’ for your tax write-offs.
But digging into your tax-deductible expenses could help take the sting out of the tax man’s next visit.
Let’s break down exactly what tax-deductible expenses are, and what you can and cannot claim so your expenses are working hard for their keep.
Spoiler alert: We may even let slip the next tax deadline.
- What are limited company allowable expenses?
- What kind of expenses can I get tax write-offs for?
- What kind of expense can you not get tax relief for?
- How can I calculate my allowable expenses?
- How can I claim my allowable expenses?
- When is the deadline to claim my allowable expenses?
- Remove the tedious admin from your expenses
What are limited company allowable expenses?
When a limited company has to spend money on a service or item that it needs to run as a business, they qualify as tax-deductible expenses.
This means the government will let you subtract the cost of that expense from your revenue, and only tax you on the profit that remains.
A phenomenon more commonly known as tax relief.
Let’s say your company turned over £600,000 in revenue in the last tax year, but a big old £67,000 chunk of it was necessary expenses. So long as those expenses qualified as tax deductible you’d only be taxed on your £533,000 profit.
Sort of. The rules for what constitutes a limited company allowable expense are slightly different than the rules for self-employed people. For a limited company, allowable expenses have to be necessary to run the business and ‘wholly and exclusively’ for the benefit of the company.
To take advantage of these wonderful tax write-offs, you need to fully understand which expenses are allowable and which are not. As well as have thorough and effective bookkeeping procedures in place so you can prove you’ve followed the rules to HMRC if they check in on you.
What kind of expenses can I get tax write-offs for?
Allowable expenses for a limited company are defined as things your business couldn’t run without, that you use ‘wholly and exclusively’ for business purposes.
Keep reading to discover a few surprising things that qualify under that definition and a few even more surprising that don’t!
If you’re renting an office there are some necessary things you have to purchase to be a functioning business, such as:
- Phone lines
- Broadband contract
- Office equipment
So long as your office is used ‘wholly and exclusively’ for your business, you can claim every last penny of these as a limited company allowable expense.
Can you claim coffee as a business expense UK?
If it’s in the office and every single staff member has access to it, you can indeed claim tea and coffee as a limited company allowable expense. You can also claim it if you’re travelling for business purposes and have to get a coffee or cup of tea on the go.
This is Britain after all.
Use of home as office
Lots of limited company directors will start off working from a room or garage in their house, and there are ways you can claim expenses like a percentage of your rent and heating.
Likewise, if you have employees working from home and you’re offering to cover some of their costs, you can claim this back as well.
For employees looking to claim back tax for working from home that your company hasn’t covered, check out our blog post that delves into the specifics of working-from-home tax relief over the last few years.
If you’re a limited company then keep reading to learn the three different ways you can claim:
Use HMRC’s flat rate
The simplest way to claim back expenses from working at home is to use HMRC’s flat rate. Currently, this means you can claim £6 a week for everything (heat, light, broadband contract) which comes to a grand total of £312 for the whole year.
HMRC explain this method of using the flat rate in more detail on its website. The benefits of using this method are that it’s simple, fast and you don’t need to show your receipts!
But £6 is only a decent rate if you’re only heating and lighting a small area of a house. If you’re using a larger room or multiple rooms of your house for work purposes then other methods of claiming may be more lucrative for you.
Take a proportional allowance of utility bills
With this method, you’ll need to work out the exact proportion of household costs used solely for business purposes. For example, you might heat and light 20% of your property (the square footage of one spare bedroom) for 40% of the day (9 hours) solely for business purposes. You can take those percentages and work out exactly how much of your energy bill you can claim for.
You are likely to claim more back this way though it’s a bit more effort intensive.
Be aware you cannot claim back things like your phone line or broadband contract this way unless you have a separate business internet and phone line at home.
This is because limited company allowable expenses must be ‘wholly and exclusively’ used for business purposes. You’re likely to already be paying a flat rate for your internet and phone for personal purposes, and using them for business costs you no extra.
Whereas you do pay extra on your heating and lighting bill specifically to keep your home warm and lit whilst working.
Create a rental agreement between you and the limited company
This is the only way you can claim back any proportion of your rent or mortgage or council tax as an allowable expense. You’d need to have a formal rental agreement in place between you as the director or employee of the company, and the company itself.
HMRC goes into more detail on their website, but make sure you’ve checked whether using your home in this way may affect your capital gains tax and private residence tax relief if you decide to sell.
If you use a significant proportion of your home exclusively for your business or have clients or employees using it, you may also become liable for business rates (which is sometimes called commercial tax). Contact the Valuation Office Agency if you think this might apply to you.
(Don’t worry, having a laptop in your bedroom doesn’t count.)
Rent on business premises and business rates
If you can claim back a proportion of your rent when working from home, it only makes sense you can do the same with business premises right?
You can claim back the cost of rent of your office or shop as a limited company allowable expense, and if you have to pay commercial tax or a business rate here you can claim this back as well.
If the company pays for the travel costs, and it's necessary for work, then you can claim this as a limited company allowable expense. This does not include your bog standard everyday commute between the house and the office, but unavoidable travel for a specific work purpose.
When it comes to how swankily you want to travel you can justify something like flying business class so long as it's, you guessed it, ‘wholly and exclusively’ for business purposes. Like needing the extra space to work during the flight.
If you or your employee made the journey by car then you can use HMRC’s mileage rates to calculate the travel expenses like petrol costs and wear and tear.
As well as mileage you can also claim travel expenses like:
- Road or bridge tolls
- Congestion charges
- Public transport, including train, bus, air and taxi fares
- Car or van insurance
- Car or van repairs and servicing
Can you claim every lunch on the job as a tax-deductible expense? Unfortunately not.
But employees and directors can claim food expenses if they’re incurred in the line of necessary business travel or outside of their normal working routine.
Read our blog for HMRC’s meal allowance rates to get all the juicy details.
Salaries and subcontractors
We’re pleased to announce salaries for employees and directors, including any national insurance contributions you pay out, are an allowable expense.
It can only be from salaries paid in the relevant tax year though, so make sure you stay on top of claiming salaries in your yearly tax return rather than trying to bank them for bumper tax relief at a later date.
We regret to inform you that dividend payouts are not an allowable expense, and do count towards your company’s profit.
Look at HMRC’s guidelines on rates and thresholds for employers to find out more.
Contractors' costs are an allowable expense so long as your business couldn’t run without that person’s service (and it’s wholly and exclusively for business purposes of course).
Stock and materials
From paper for stationery shops to vegetables for restaurants, if your business sells a physical product then the cost of raw materials or stock you buy is an allowable, tax-deductible expense for limited companies.
Clothing expenses like uniforms or PPE
You can claim back the cost of uniform, but bear in mind that HMRC defines uniform as:
“a set of specialised clothing that’s recognisable as identifying someone as having a particular occupation, for example, nurse or police uniforms.”
It does not classify a certain design or colour as a uniform, so if you buy your employees all-black smart clothing (or let them buy their own and expense it back) this is not something you can claim tax relief on.
You absolutely can claim tax on buying or hiring protective clothing or uniform, and the cost of laundering or dry cleaning that uniform. That might look like steel-capped boots, goggles, high visibility jackets or other forms of personal protective equipment.
Health screenings, medical check-ups and eye tests
Whilst we’re in the realms of health and safety it’s worth noting that paying for your staff’s eye tests or medical checkups is considered a tax-deductible expense in certain scenarios.
When it comes to eye tests if your staff (or your good self), spend most of your time in front of screens or visual display devices, then you must arrange and pay for an eye test if an individual asks for one.
In fact, you may want to offer these as standard as they are allowable expenses.
If the employee then needs glasses wholly for their work in front of display and screen equipment, then you’re obligated to pay for it, and you can then claim this back as a tax-deductible expense.
But if the employee needs glasses for their general day-to-day life, then the onus is on them to pay for it.
When it comes to health screenings and medical check-ups you can offer one of each every year to any employee and claim this as a tax-deductible expense.
Remember a healthy workforce is a happy one, as is a CFO who’s optimised their tax deductible expenses.
Financial costs like bank charges, insurance and pensions
So long as the financial cost is necessary, and has been incurred (here we go again) wholly and exclusively for business reasons you can claim back bank charges, insurance fees and pensions.
Bank charges can include account maintenance charges, withdrawal and transfer fees and automated teller machine (ATM) fees.
Lots of types of insurance are considered tax-deductible expenses including:
- Travel Insurance
- Breakdown cover
- public liability insurance
- Employers liability
- Professional indemnity insurance
- Contents insurance
Make sure you or your finance team researches this thoroughly, as not all kinds of pensions are allowed and the timings of when you can claim are very specific.
Advertising and marketing expenses
Most advertising and marketing costs are allowable expenses for a limited company, which is fabulous news considering just how much a good marketing budget can come to.
In principle, most staff entertaining is considered an allowable expense for tax write-offs, unlike entertaining clients. This might look like food, drink, taxis or accommodation at an annual event.
(Involuntary flashback to that Christmas party you’re still trying to forget.)
Technically, an employee should be charged income tax on the value of these benefits. Which is a bit of a downer if you ask us.
That’s why lots of companies stick to the Annual Party Exemption, meaning they can spend up to £150 a head per tax year on entertaining staff without anyone getting charged income tax or national insurance.
This is why lots of employers host a Summer and a Christmas party as a way to keep track of their expenditure on entertaining employees.
With legal fees, it depends on how the fee has been incurred by the company.
If it’s part of the company’s day-to-day trading activities, and you can deem it a necessary business expense then you can usually claim the fee as tax deductible.
This might look like legal fees related to:
- Employment matters
- Trading disputes
- Release renewals
- Collections of debt
But legal fees from acquiring property, the purchase of a new lease or any kind of legal fine that’s been incurred as a result of breaking the law are usually not claimable.
That includes parking tickets, we’re afraid.
Donations to charity
If your limited company is in the giving spirit and decides to donate to a charity, then that is an allowable, tax-deductible expense. So long as there aren’t any conditions associated with the donation.
The government breaks down exactly what kinds of donations are and are not a limited company allowable expense on its website.
What kind of expense can you not get tax relief for?
While we’re here we may as well give you a few red flags as far as allowable expenses are concerned. These are absolutely not considered limited company allowable expenses as far as tax relief is concerned.
- Income paid as dividends, as opposed to a salary
- Entertaining clients, no matter how necessary it is to the business
- Gifts to clients, unless the gift is under £50 and includes an obvious advertisement of your business
- Fines, as mentioned above these are unnecessary legal fees so are not something you can claim
- Assets like property going down in value, and any renovations you want to make on them
And just in case you missed it…
How can I calculate my allowable expenses?
You must keep track of exactly what expenses you’ve incurred over your accounting period, and make sure you’ve kept a physical or digital receipt of it.
Depending on the size of your company you or your finance team should:
- Be keeping a spreadsheet that keeps an accurate record of what’s been spent so far
- Have another spreadsheet that predicts what is likely to be spent for the rest of the year
- Have written and shared a business expense policy document
HMRC investigations into innocent errors in tax can go back up to 4 years, for careless errors up to 6 years and for deliberate tax fraud up to 20 years.
So make sure you keep your records in good order, long after you’ve filed your taxes.
How can I claim my allowable expenses?
When you pay for something that you know is tax deductible allowable expense for your company you can do it straight from your limited company’s business account.
You can also pay for something on your personal account, and claim it back from your business account as an employee would.
By keeping the receipt or a record of the expense you can then include it in your corporation tax bill. You’ll deduct all of your allowable expenses from your revenue leaving your actual profit behind to be taxed.
When is the deadline to claim my allowable expenses?
The deadline for sending your accounts to Companies House is nine months after the end of your accounting period, and your corporation tax bill is due one day later. Every company has a different accounting period so the actual deadline will vary depending on when yours is.
You’ll need to work out how much your allowable expenses add up to, deduct it from your revenue and work out how much tax you owe by the time you make this payment. (Most companies decide to keep the same accounting year for their accounts and corporation tax. Two birds, one rather tedious admin-filled stone).
You won’t have to share your corporation tax return till 12 months after your company’s accounting period.
Bear in mind that these deadlines will be different in your first year of trading, and keep an eye out for HMRC and Companies House to notify you of this.
Remove the tedious admin from your expenses
Pleo can help you automate your expenses from start to finish, so you can have it all ready when tax return time rolls around without adding a single manual digit to a spreadsheet. You can even integrate it with your accounting system of choice, from Sage to Quickbooks.
Pretty cool? We think so too.
Try automating your allowable expenses with Pleo today.
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