Limited company expenses: the rules
If you’ve set up a limited company, tax-deductible expenses have to be ‘wholly and exclusively’ used for your company. If you pay for something that has a combination of business and personal use – for example you take a work trip abroad and then spend a few extra days on holiday – only the business part of the cost is tax deductible.
But as long as an expense is allowable, you can deduct it from your revenue to calculate your taxable profit.
A lot of your costs are allowable expenses for your limited company, including:
- office equipment
- salaries
- business insurance
Generally, any money you spend on entertaining clients or gifts is not allowable, even if it’s a genuine business expense.
It’s important to have a record of all of your limited company expenses, so make sure you keep all of your receipts, invoices, and any other important paperwork.
Keep in mind that you need to keep records for at least six years after you’ve filed your tax return, as HMRC could investigate at any point within this timeframe.
Read more about keeping tax records.
List of allowable expenses for a limited company
Many of the costs involved in setting up your limited company and keeping it running are allowable business expenses, for example:
- the costs for forming your limited company
- premises costs, like rent and utility bills
- salaries and other staff costs
- the cost of stock or raw materials
- office costs, like stationery and phone bills
- travel and accommodation costs for business trips (but not commuting costs)
- legal and financial costs, like accountancy fees and your professional indemnity insurance
- advertising and marketing costs
Business entertainment costs aren’t usually tax deductible. But you can host a social event for your staff and claim it as a business expense, as long as the cost doesn’t exceed £150 per person, and it’s an annual event (such as a Christmas party) that’s open to all staff.
Capital allowances
It’s a bit different if you buy an asset for your business. If you buy something that you’re going to keep and use in your business, like a piece of machinery or a work van, you can claim capital allowances on your tax return.
This means that you can deduct the full value of the item from your revenue before tax, using your annual investment allowance (AIA). The AIA has been temporarily increased to £1 million until 31 December 2021.
What about limited company expenses and employees?
If you provide benefits or expenses to your employees (including to yourself as a director), such as travel expenses or health insurance, you may have to tell HMRC and pay tax and National Insurance on them.
Check the list of employee expenses and benefits on the government’s websitefor the rules about each type of cost.
If your employees incur expenses during the course of their work, ask them for receipts so you can reimburse them. Then, include these purchases when calculating your tax deductible expenses.
Remember that normal commuting costs aren’t tax deductible, but you can claim for other staff travel costs, for example when an employee visits a client or goes to a conference.
It’s a good idea to have an employee expenses policy in place so that your employees know which expenses you will reimburse, and they know how and when they’ll be paid back.
When you’re running a small business through a limited company, you may find yourself paying for costs that relate to the company’s work using your own personal credit or debit card.
How can you record these so-called out-of-pocket expenses in your company’s accounts and make sure that you don’t find yourself paying extra tax when the company reimburses you for the expenses?
Tracking your expenses
If you pay company costs yourself, it’s important to track these costs separately from the costs that are paid from the company’s bank account. This is because you need to know how much the company has in its bank account to pay crucial bills like salaries and taxes. If you mix up out-of-pocket expenses with costs the company has already paid for, you may find yourself panicking that the company’s bank balance looks lower than it actually is.
Also, if your company’s books are ever checked by HMRC, the first place they will look at is your record of what’s in the company’s bank account. If they find a mismatch between that record and the bank statement, they may draw the conclusion that you are concealing income from them and impose increased tax demands.
Beware taxable repayments
When you incur expenses on the company’s behalf, entering them into the company’s books as a cost is called ‘claiming’ those expenses. The company might then repay you for what you have claimed. You need to think about whether HMRC will treat any repayment to you from the company as taxable income for you.
If the company is repaying you only for expenses that HMRC are happy with, then the repayment won’t be taxable.
But the rules can be quite complex in terms of what HMRC are happy with. For example, as the director of a limited company, you can normally claim the cost of food and drink you buy when you’re out and about on company business. But you wouldn’t be able to reclaim the cost of a packed lunch you made at home to take with you to eat while travelling, without paying extra tax when the company pays you back.
You also wouldn’t be able to claim the cost of clothing you bought to wear for work, even if you only ever wear those items of clothing at work, for example the cost of a suit for an architect or a solicitor. If you did claim for these, then you would pay extra tax when the company reimburses you.
The exceptions to the clothing rule are:
- A uniform that identifies you as being a member of your profession, for example a nurse’s uniform, or
- Protective clothing, such as steel toe-capped boots for a construction worker, or
- An entertainer’s costume, for example a wizard’s outfit to wear as a children’s magician.
If you claim these, then your company can reimburse you without extra tax being levied.
Don’t miss out on forgotten expenses
There are certain expenses that company directors often forget they can claim – which is a shame because omitted costs not only push up the company’s tax bill, they also leave the director out of pocket.
The two classic ‘forgotten expenses’ are:
- Mileage for business travel in the director’s own car. You can claim 45p/mile for the first 10,000 miles travelled in the tax year, 25p/mile thereafter. Be careful with what counts as ‘business travel’, though, for example, journeys between your home and a ‘permanent workplace’ don’t count and if you claim for those, the reimbursement will be taxable.
- Costs for working at home. You would normally be able to claim some of your home-running costs if you are working from home out of necessity as opposed to choice, and you are carrying out work that earns the company money at home, as opposed to purely administrative tasks such as writing up your accounts. The government has said that being home-based as a result of the coronavirus pandemic, for example during a lockdown or because your clients have closed their premises, does count as working from home out of necessity.
- If you’re in any doubt about whether you can claim a particular expense without paying extra tax when your company pays you back, speak to your accountant for more advice.