How do Business Expenses work?
When your company spends money on something that qualifies as a business expense, that cost is deducted from your limited company’s profit before Corporation Tax (CT) is calculated. The lower your taxable profit, the less CT you pay.
The Key rule HMRC applies is that a company expense must solely be for business purposes. If there’s a personal element to it, even a small one, it might not be fully allowable. Some company expense fall into a slight grey area which will be covered below, however the principle is straightforward, if it’s a genuine a business expense, its likely allowable.
What Company Expense can you Claim?
Travel
Business travel is allowable. This includes train ticket, taxis, flights, parking and hotel accommodation when travelling for work. If you use your personal car for business journeys you can claim a mileage allowance at 45p per mile for the first 10,000 miles, and 25p per mile for each mile after that. You cannot however claim for your regular commute between home and your workplace.
Office Costs
If your company rents office space, the rent and associated costs such as broadband, insurance, and utilities are all allowable. Postage, stationary and other day to day office supplies also qualify.
Staff Costs
Salaries, pension contributions for employees, and employer National Insurance (NI) contributions are all allowable business expenses . This includes your own salary as a director, provided its processed through payroll correctly.
Professional Fees
Legal, accountancy, and cost of professional subscriptions relevant to your business are allowable. The cost of filing your accounts and CT return, including using a service such as Easy Digital Filing, also qualifies.
Marketing and Advertising
Online advertising, social media marketing, physical advertising, website costs and the cost of any marketing materials are all allowable company expense.
IT and Technology
Computers, monitors, software subscriptions, laptops and business phones are allowable. If you buy equipment outright rather than as a subscription, it might need to be treated as a fixed asset and claimed through capital allowances rather than just as an operating business expense, which is also covered below.
Bank Charges
Business bank account fees and charges are allowable company expenses.
Training
The cost of training directly related to your existing business activities is allowable. This includes books, courses and professional development that’s relevant to your trade.
What Business Expenses you can’t Claim
Client Entertainment
This is the most commonly misunderstood area. Taking a client out for drinks, dinner or even to a sporting event is not an allowable expense for CT purposes, even if its completely for business reasons. The cost can go through your company accounts but will still need to be added back when calculating your tax bill, hence you get no tax relief on it.
Personal expenses
Anything that has a personal element and doesn’t meet the exclusivity criteria isn’t allowable as a business expense.
Clothing
General clothing isn’t allowable even if you only wear it for work. The exception is branded uniform or PPE that can’t be used outside of work.
Penalties & Fines
Late filing fines, parking fines, and any other regulatory fines aren’t allowable as a company expense.
The Grey Areas
Working from Home
If working from home you can claim a proportion of your household costs such as heating, electricity and broadband. HMRC provides a flat rate of £6 per week as a simple option, or you can calculate the actual proportion attributed to business if you feel your costs are higher.
Food & Drink
Day to day lunches or trips to the coffee shop are not normally allowable. But it you are travelling away from your usual workplace on a business trip, subsistence costs like meals during that trip are usually allowable.
Mobile Phones
A mobile phone contract taken out in the company’s name for business use is fully allowable. If you use a personal contract for business calls you can only claim the proportion used for business.
Staff Entertainment
Staff entertainment does have an exemption, unlike client entertainment. An annual event such as a Christmas party is exempt from tax up to £150 per head per year, given that its open to all employees. The full amount however does become taxable if you go above that limit.
Disallowable Expenses and Your Corporation Tax Return
Its important to understand that an expense going through your company accounts doesn’t automatically mean you’ll get tax relief on it. Some expenses are disallowable for CT purposes, meaning they should be added back when calculating your taxable profit.
Client entertainment is probably the most common example of this. For example; if your company spends £3000 a year on client entertainment, that £3000 goes through the P/L as an expense, reducing your accounting profit. However, when preparing your CT return, you add back that £3000, as a disallowable expense, meaning your taxable profit is £3000 higher than your accounting profit and therefore you pay tax on it accordingly.
This is why it’s vital that you categorise your expenses correctly throughout the year. It makes preparing your accounts and CT600 a lot more straightforward, and also ensures your tax calculation is accurate.
Keeping Good Records
HMRC may also ask to see evidence of a business expense you have claimed, so keeping receipts and proof of purchase is definitely something worth doing and a good habit to get into, rather than attempting to scramble for records at year end. Most businesses use a spreadsheet or book-keeping software to track company expenses throughout the year.
To Conclude
Claiming the right expenses as a limited company is one of the simplest ways to reduce your CT bill and is something every limited company director should understand. The core principle is pretty straightforward; if its exclusively for business purposes, its likely allowable. When unsure, keep the receipt and check.
