A Guide to Expenses for a Limited Company
18/12/2020
As a limited company, you are responsible for your Corporation Tax bill. It’s important to understand allowable expenses to ensure your tax bill isn’t higher than it should be.
Allowable business expenses can be subtracted from your revenue to calculate your company’s profit, and the amount of Corporation Tax to pay.
What are the Rules of Limited Company Expenses?
Make sure the expenses you claim for are allowable. If they are, you can deduct them from your revenue to calculate your taxable profit.
Fortunately for business owners, most of the costs incurred for running a business are classed as allowable. This includes costs such as - office equipment, salaries, and business insurance.
There are some instances where there is crossover of personal and business use. Let’s look at a business trip abroad for example. If you need to travel for work, but then stay for a short holiday, only the work part of the trip is tax deductible.
Entertaining clients of gifting is more of a grey area – but usually this is not classed as an allowable expense, even if it is a genuine business expense.
Many limited companies provide benefits or expenses to their employees (including to yourself as a director). For example, health insurance or travel expenses. If you do, make sure to inform HMRC as you may have to consider tax and National Insurance for them. See the gov.uk list of benefits here if you’re unsure.
In order to claim expenses, you need to keep a record such as receipts, invoices, and any other important paperwork. Make sure you keep this proof for at least six years after you’ve done your tax return. Up to this timeframe, HMRC may request evidence to prove the expenses.
What are Allowable Expenses?
As mentioned earlier, most of the costs of running a business are allowable, let’s look at some examples:
- initial costs for forming your limited company
- premises costs (rent & utility bills)
- salaries
- the cost of stock & materials
- office costs (stationery & phone bills)
- travel & accommodation costs for business trips (but not commuting costs)
- legal & financial services fees
- marketing & advertising costs
Business entertainment costs are not usually classed as an allowable expense.
But there’s an exception. If you host an annual social event (such as a Christmas party) which is open to all staff and doesn’t cost more than £150pp – you can claim it as a business expense.
Capital Allowances
Capital allowance is slightly different to a business expense. When buying an asset for your business, which you intend to keep and use for work (such as an essential piece of machinery) you can claim capital allowance on your tax return.
Wondering what this means? Well, using your annual investment allowance (AIA) you can deduct the full cost of the item from your revenue before tax. Recently, the AIA has been temporarily increased to £1 million, so keep an eye on this going up or down in the future.
Expenses for Employees
Your employees may incur expenses whilst working for your limited company. This is ok, but if they do, ensure they keep receipts so that you can officially reimburse them. With receipts, it also means you can include these expenses when you conduct your tax return.
Something important to remember: the cost for regular commuting is not tax deductible. However, you can claim for other staff travel costs, for example if an employee visits a client in another location or goes to a conference.
To ensure no ambiguity in this area between you and your employees, it’s a good idea to have an employee expenses policy. This means your employees know which expenses you will reimburse, and they know how and when they’ll be paid back.
So, that’s it, your guide to expenses for a limited company. Just remember to keep any important documents and receipts to ensure you don’t end up paying more Corporation Tax than you should.
Tax can be complicated so we’d always recommend getting professional advice from an accountant, or checking gov.uk if you’re concerned.
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