Guide to buying personal items through your limited company

As a limited company owner, you need to be clear on what you can and can’t claim as expenses.

We are often asked about whether you can claim the cost of buying personal items through your limited company. You can deduct your costs of running your business from profits before tax when they are ’wholly, exclusively and necessary’ for business purposes. However, costs of things for personal use must be treated very differently.

In this blog, we will look at the difference between business costs that will qualify as allowable company expenses and personal expenses.

Can I buy personal items with my business account?

A director using company money for personal use isn’t illegal, but it’s not good business practice. It begins to muddy the waters of your accounting and tax records and may make you subject to a HMRC tax investigation later down the line if you’ve classified some personal items as business expenses.

As a limited company director, you can technically put whatever expenses you want through the limited company as long as they are properly recorded and the right amount of tax and National Insurance is paid on them. If they are personal items, then there is no tax or NI saving through putting them through the company.

Tax on personal expenses paid through a limited company

Benefit in kind

Anything you or your employees get personal use from that is purchased through your limited company’s bank account must be treated as a benefit.

These ’benefits’ must then be reported separately to HMRC and you are likely to have to need to pay tax and National Insurance contributions (NI) on them.

As an employer if you offer employees gifts, you have certain tax, National Insurance and reporting obligations.

There are different rules depending on the type of gift you give. Follow the reporting and payment rules for the specific item.

Director’s loan account

You could also post expenses for your own personal items to a director’s loan account. A Director’s Loan account (DLA) records transactions between the company and its director that fall outside any salary, dividend, or expense repayment.

The director’s loan account details money borrowed by directors from the company or money lent by directors to the company.

The director’s loan account can contain the following transactions made by directors or close family:

• Cash withdrawals from the company.
• Personal items that were purchased using company money or credit cards.
• Cash loaned to the company.
• Limited company’s expenses paid using personal funds.

At the end of your company’s financial year, you must include any money you owe the company for personal items purchased or money borrowed or the company owes you on the ‘balance sheet’ in your annual accounts.

You may have to pay tax on director’s loans. Your company may also have to pay tax if you’re a shareholder (sometimes called a ‘participator’) as well as a director.The Directors Loan Account is often cleared with dividends.

Additional salary

Personal expenditure put through the limited company could also be treated as additional salary, in which case you will need to pay personal tax on these costs. You may well incur income tax and NI on the amount.

VAT and personal expense claims

Your company cannot reclaim VAT on expenditure on personal items made through the limited company.

Trivial benefits

Directors and/or office holders of a limited company (a limited company run by five or fewer shareholders) can receive trivial benefits.

Ordinary employees can receive trivial benefits of £50 or less once a month provided certain conditions are met. For directors, the limit is six monthly benefits in a tax year and HMRC has set an annual cap of £300 for trivial benefits for directors.

As a director, you can provide benefits to a family member, household member and claim for these as part of your director’s allowance for the tax year.

Separating business and personal finances

It’s essential to keep business finances and personal finances separate to avoid confusion and ensure accurate accounting.

Business accounts should be kept separate wherever possible. Using a business account for expenses for personal items can lead to financial and accounting issues and also much more complex tax and reporting issues.

Keeping personal and business expenses separate will ensure compliance with HMRC regulations.

Understanding business expenses

What does an allowable business expense mean?

Allowable expenses are tax-deductible, meaning HMRC allows you to offset those expenses against your company profits and your annual corporation tax payment.

Limited companies can spend company funds on anything, but you can only claim allowable business expenses against the company’s corporation tax liability.

Examples of limited company allowable business expenses include travel costs, business insurance, computer software, accommodation costs for business trips, business calls, professional fees and equipment purchases. See below for a more comprehensive list of allowable expenses for limited companies.

A tax deductible limited company expense must be “wholly, exclusively, and necessary” for business purposes to be eligible for tax relief.

The rules for limited company business expenses

There are several rules to bear in mind when considering what will be classed as a tax-deductible or allowable limited company expense.

• 1. An allowable expense can only be claimed for costs that you incur wholly and exclusively for setting up and running your limited company.
• 2. You can’t claim for expenses that have a dual purpose for business and personal use. For example, if you decide to extend a business trip for leisure purposes, you will only be able to claim for the days of the trip that were business days, not the additional costs of the leisure days.
• 3. You can pay for business expenses directly through your company’s bank account, or you can reclaim the costs of business expenses paid with your own money and get the company to later reimburse you from the business bank account.
• 4. Most company expenses can be offset against your taxable profit and will reduce your company’s corporation tax liability. However, there are some exceptions such as client entertainment (read more below).
• 5. You need to keep accurate records of any limited company expense, including start-up, formation costs and day to day running costs. You need to retain invoices and VAT receipts as they are crucial in case of queries or an investigation by HMRC in future.

What expenses can I put through my limited company?

You can put almost anything you want through your limited company. However, there are strict rules as to what are allowable expenses that are tax deductible for corporation tax purposes.

Allowable business expenses are things that are used wholly and exclusively in your business.

Ensuring you claim all allowable expenses through your limited company is a tax efficient way of running a limited company.

Here are some examples of business costs that will qualify as allowable for your limited company expenses.

Advertising, marketing and PR expenses

Any type of advertising, marketing and PR, whether it is a one-off or ongoing cost, if the investment is to promote your business.

Bank charges

The bank fees for your business bank accounts, including credit card and loan interest.

Business insurance

Any type of business insurance policies including things like business buildings & contents insurance, public liability insurance, employers’ liability, and professional indemnity insurance.

Entertainment expenses

Business entertainment IS NOT an allowable expense against company profits. However, as part of your duties as a limited company director, you may need to spend money on business entertainment, then you can claim it as a business expense. However, business entertainment costs will not be tax deductible against your corporation tax bill.

Equipment and furniture

Business equipment such as printers, photocopiers, computers, software and scanners. Items such as office furniture, like chairs, desks, storage units will qualify as business assets if they are used wholly for business purposes.

Office costs

Office costs such as stationery, printer cartridges, other computer consumables and postage.

Phone bills

Landline phone bills, mobile contracts and broadband costs can qualify as a limited company expense. If your landline bill and mobile phone contract are in your company’s name, you can claim the entire bill as a business expense. If you make business calls from a home phone line or mobile where the bill is in your personal name, then you can claim for these calls only and not the entire phone bill.

Professional fees

Professional fees such as accountants, lawyers, architects, or other consultants.

Professional subscriptions and memberships

Industry specific magazine subscriptions and books where they are associated with the trading activities of the company

Professional membership fees but only if it can be shown to provide a clear benefit to the business and only if you must have membership to do your job or it’s helpful for your work.

Check out the HMRC approved list here.

Professional development expenses

Personal development and professional training courses including travel and accommodation while attending a training course.

HMRC often won’t allow expenses for courses like MBAs, or courses offering new skills and knowledge rather than building on existing skills. They may be allowed if you demonstrate that they are reinforcing/improving your existing knowledge/skills for business purposes.

Travel expenses

Travel expenses if the travel is necessary for work purposes. (This doesn’t include your commute between your home and permanent workplace).

You can also claim other travel related expenses such as

• Parking costs.
• Road toll fees.
• Congestion charges.
• Food and drink.
• Accommodation costs.
• Public transport costs.

Use of home as office

If you use your home to run your business, then you will be able to claim a percentage of your household costs and utility bills as business expenses. You have a choice to claim a flat rate of £6 per week or work out which rooms you use for your business needs and the time they are used for business purposes and charge a proportion of your bills.

Other expenses

There is a wide range of other expenses you can claim such as:

• Health check and eye test costs.
• Childcare expenses.
• Annual staff party expenses up to £150 per person.
• Start-up costs to form and begin to run your business can be claimed up to seven years before the company started trading.

Pension contributions - be aware of a £60,000 limit per year (subject to certain restrictions).

Download the dns accountants’ expenses guide for limited companies here.

How to claim expenses as a limited company

Limited company’s expenses can be paid directly from your business bank account, or you can pay for something personally and your company can the reimburse the expense to you. Ensure that you and employees collect VAT receipts for any expenses claimed.

Keeping records of company expenses

You need to ensure you keep accurate records of any limited company expenses. This should include invoices, relevant receipts etc. If you don’t, HMRC can query these expense claims and ask for copies of receipts and invoices or they could subject you to a more thorough tax investigation.

For help and advice on what allowable expenses your limited company can claim, contact us today 0330 088 6686 can also e-mail us at enquiry@dnsaccountants.co.uk

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