Limited Company Expenses
Navigating the intricate landscape of self-employment is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Limited Companies. But what limited company expenses can I claim?
Limited company expenses can be a minefield. Whether you’re just starting or a seasoned director, understanding what you can claim is crucial to ensure your business remains tax-efficient.
In this comprehensive guide, we delve deep into the heart of limited companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions.
Limited Company Expenses
As a limited company owner, claiming allowable business expenses reduces your ‘profit-before-tax’. This, in turn, reduces the amount of corporation tax owed to HMRC. More allowable expenses mean less taxable profit and a lower tax liability.
You can either pay your limited company expenses directly from your business account or pay them personally and have the company reimburse you.
Any employees you have are also allowed to claim expenses, so it’s essential to establish clear guidelines regarding how much they’re allowed to spend and when. You must file all expense claims regularly, and your employees must record all expenses with receipts.
Maintaining Adequate Records
Maintaining accurate records of your limited company expenses is critical. It is also advisable to keep all invoices and receipts in case HMRC decide to query a particular claim; you may need to prove it is a legitimate business expense.
If you have regular business expenses or have employees claiming expenses, it may be worth investing in expense management software. The software dramatically simplifies the expense tracking process.
‘Wholly and Exclusively’
For an expense claim to be ‘allowable’, it must be incurred ‘wholly and exclusively’ for the purposes of business. The terms ‘wholly’ and ‘exclusively’ are designed to prohibit expenditure that serves a dual purpose, a business purpose, and a non-business purpose.
An example of dual-purpose expenditure is money spent on ordinary clothing worn at work. Clothing worn both in and out of work obviously has a dual purpose, so no deduction is allowed. Expenses that serve a dual purpose may be allowable in two circumstances:
i) Apportionment
A single expense can be apportioned if an identifiable percentage of that expense can adequately be attributed wholly and exclusively to the performance of the duties. That part can booked as an allowable expense, while the rest cannot.
For example, an employee’s car may be used for business and private purposes. Where it is used to make a business journey, the cost of that journey is incurred wholly and exclusively to perform the duties of the employment and so is allowable. Where it is used to make a personal journey (including commuting to a regular place of work), the cost is not permitted.
ii) Incidental
Where the non-business purpose is merely incidental, the whole expense can be deducted.
A self-employed consulting engineer may travel to exotic locations to advise on projects. The travel and the exotic places may be benefits, but where there is no private purpose, they are incidental to the carrying on of the profession, and the expense is allowable.
What Expenses Are Allowable?
We’ve outlined some common expenses you can claim as a limited company director:
Accommodation
If you’re travelling for work and must stay overnight away from your home, you can claim the accommodation costs.
Advertising
If you are advertising to promote the goods and services your business offers, it can be claimed as an expense.
Bank Fees
Bank fees, including credit card and loan interest, charged to your business account are allowable expenses.
Car & Van
If you use your personal car or van to travel to a temporary place of work, you can claim mileage and fuel costs according to HMRC’s approved rates.
Clothing
Clothing is only allowable under limited circumstances, for example, if it is necessary to do your job. High-vis jackets and steel-toe boots would be permissible when working on a building site, but trainers bought as part of your everyday wardrobe that you wear to the office would not.
Computers
The company can claim expenses if you use the computer equipment solely for the purposes of the business. If you already own equipment and want to bring it into your business, you can claim tax relief on the market value at the date of transfer.
Entertainment
Entertaining your employees may be allowable for tax purposes if it is an annual event (such as a Christmas party) open to all team members and costs less than £150 per person. You can’t claim relief for entertaining clients.
Food & Drink
If you’re travelling for work and need to stay overnight away from your home, you can expense the food and drink costs you incur. You cannot expense lunches at your permanent workplace.
Insurance
You can claim the cost of most insurance policies (public liability, employer’s liability, professional indemnity, etc) as long they are exclusively for business purposes.
Medical Treatment
In certain circumstances, a company can provide medical treatment for employees without it being considered a taxable benefit; however, this is extremely limited. Glasses, eye tests and annual checkups are all you can claim without incurring a BIK.
Take chiropractic appointments as an example; these are a no. It has been tried before, usually with the reasoning of “I sit at a desk all day, and my back hurts”. HMRC’s counter is that you don’t just need your back for work; you need it for everyday living. It, therefore, doesn’t pass the ‘wholly and exclusively’ test.
HMRC is stringent in its application of these rules. There was a case where a musician injured his hand, but the surgery required was ruled not allowable as he used his hand in his personal life and business.
There are some examples where claims have been successful (a stunt rider’s knee surgery being one), but these are exceptions to the rule.
Pensions
Pension contributions are allowable expenses. When a limited company makes contributions to a pension scheme, the cost of these contributions brings 100% tax relief.
Phone Bills
If your mobile phone is used solely for business purposes, you can claim the entire bill as an expense. If there is some personal use, only the business-related element is an allowable expense.
Professional Fees
You can claim the total cost of professional fees (legal, accountancy, etc.) incurred for the business.
Professional Subscriptions
Magazine subscriptions, journals and other reading materials specific to the business’ occupation are an allowable expense.
Salaries
All salaries and corresponding National Insurance contributions are allowable business expenses and serve to reduce the business’ corporation tax liability.
Software
Any computer software or applications that your business uses are allowable expenses.
Start-Up Costs
Start-up costs (such as internet and domain fees, legal support, company formation, etc) can be claimed as limited company expenses for up to seven years before a company starts trading.
Training
Professional development and training costs are allowable as long as they relate directly to your line of work.
Travel
Travelling to and from a temporary workplace (where you spend less than 40% of your time) is an allowable business expense. Your everyday commute between your home and permanent workplace is not.
What Expenses Are Not Allowable?
There are a few costs that are commonly thought of as allowable business expenses when, in fact, they’re not:
Childcare
Childcare costs aren’t incurred ‘wholly and exclusively’ for the purposes of your business and are not allowable expenses.
Client Entertainment
While entertaining employees is an allowable expense as long as the restrictive criteria are met, wining and dining clients is not.
Dividends
Although salary paid by the limited company is a tax-deductible expense, dividend payments are not. These are paid from the business’ profit-after-tax.
Gifts To Clients
Only gifts with a value under £50 are allowed, and they can’t carry an advertisement for your business. They also cannot be food, drink, or tobacco.
Penalties And Fines
Charges relating to a breach of the law are not allowable. Penalties, fines or costs incurred to settle the wrongdoing (such as legal fees) are not permissible expenses.
Working From Home
To claim for use of home as office expenses, you must undertake substantive duties relating to the main trade of your business at home.
HMRC allow a flat rate claim of £6 per week for home expenses without keeping receipts. This is suitable for the ‘kitchen table’ home worker, who only occasionally works at home in a space that serves some other purpose (such as the kitchen).
If you are a dedicated home worker who regularly works from home in a defined space, you can claim more than the £6 per week if you know what you’re doing. You’ll need to clearly separate business usage from private usage.
HMRC will accept most reasonable apportionment methods, providing they are based on usage. This could be area (what proportion in terms of area of your home is used), usage (how much is consumed) or time (how long is it used for business purposes).
Rent And Mortgages
Limited company directors who work from home can charge the company rent for the room in which they work. If you’re renting, this is calculated as a percentage of your rent. If you have a mortgage, this is calculated as a percentage of your interest payments, it does not cover capital repayments.
You must draw up a formal rental agreement between you and the business, and all rental income must be included on your tax return.
The amount of rent you charge the limited company must be on an ‘arm’s length’ basis, meaning it must be realistic in commercial value. You cannot calculate an amount designed to benefit you as an individual.
Your rental agreement can also be used to cover the proportional costs of the rented space, meaning you can include items such as utilities and council tax based on the proportion of the property used for business purposes. A practical way is to look at the total costs you want to claim and divide that by the percentage of rooms used for business purposes.
It’s important to note that owning your house and having a room solely dedicated to your business could have additional implications when you decide to sell your home. You may need to pay capital gains tax on the business part as it will not qualify for Private Residence Tax Relief.