If you have been running your business as a limited company for years or just started with your limited company, it is vital to keep a track of business expenses as they provide a valuable relief in tax. By claiming business expenses, you can reduce your profits and thus reduce your corporation tax liability.
- How does Tax relief work for Limited Companies?
- What records you need to keep when claiming business expenses?
- What expenses you can claim as a limited company?
How does Tax relief work for Limited Companies?
Limited companies pay Corporation Tax on the profits they make, and profits are simply calculated by deducting expenses incurred for running the business from the income the company generates. This means that by claiming allowable business expenses, you can significantly reduce the corporation tax you pay on the profits company makes.
The fundamental principal for claiming business expenses is that expense should have been incurred ‘wholly and exclusively’ for business purposes.
In case, the company is reimbursing an expense to the director/employee, it is necessary to ensure, the expense meets the wholly, exclusively and necessarily test for business.
Further, the expense can either be paid directly from your business or you could incur it personally and claim it back from the company as reimbursement. The same treatment would often apply for employees, where they can claim reimbursement of expenses incurred as part of their employment duties.
Deciding what expense is allowable can be a tricky affair and it is advisable that you should consult your accountant or contact DNS Accountants to know more on what is claimable.
What records you need to keep when claiming business expenses?
For any valid business expense claim, HMRC requires you to maintain adequate records and receipts at least for 6 years from the year the expense was claimed.
For this reason, you should record all the expenses in your accounting software (if you use one) or maintain the records in a spread sheet or a similar programme. The receipts can be stored digitally using an application or you can store paper receipts or scan the receipts and keep in your computer.
If you don’t use online software, we recommend subscribing to Nomisma. It comes with a mobile app where you can click photos and store receipts; also has an extensive expense module for recording popular expenses like mileage, use of home etc.
What expenses you can claim as a limited company?
Accommodation expense when on business travel- Expenses incurred on accommodation whilst on business travel to a temporary workplace or location can be claimed as a valid business expense. Generally, there is no fixed limit/allowance for accommodation, but your claim for the same should be of reasonable amount. When you travel to any location on temporary basis for business purpose, you can claim for accommodation expenses such as hotel, bed & breakfast, rental property expenses etc. Some special rules are also applicable for employees provided with residential accommodation.
If you are travelling overseas for business purposes you can either claim the actuals or the overseas subsistence rate provided by HMRC for the country or city you are travelling to.
Accounting fee expenses- You can claim tax relief on accounting fee paid by you to your accountant for the accounting services provided by them on your company’s behalf. The fee charged should not include any type of payment in relation to managing your personal affairs such as preparation of personal tax returns and should solely relate to your company’s accounting affairs. Otherwise it will be recorded as a Benefit in Kind (BIK) in your limited company accounts for which the company will be liable to pay National Insurance Contributions at 13.8% on BIK for the tax year 2020/21.
Advertising and marketing expense by companies- In order to grow your business, you may need to advertise and market your products and for this you need to spend money on both advertising and marketing of the products for which you can claim tax relief later. Expenses incurred on advertising and marketing including PR and networking can easily be claimed by limited company as a tax relief but if you are taking any client out for a dinner or spending on food and drinks unless it is reasonably required as part of the event/promotion, it will be treated as entertainment expense and may be disallowed as per HMRC guidelines.
Bank and overdraft charges- Limited companies can easily claim tax relief on bank and overdraft charges. You can easily claim tax relief on interest payments and charges paid on business loans as well as business bank accounts. Make sure that the bank charges you are going to claim on your business account should be authorised. Unauthorised bank charges cannot be claimed as per HMRC guidelines. For example – Standing charges levied each quarter.
Business mileage expenses- If your own vehicle is used for work travel to a temporary workplace, the mileage related to the business travel can be claimed from the company. The approved mileage allowance rates (AMAPs) applicable are given below:
Type of Vehicle Rate per mile for the first 10,000 miles Rate per mile after 10,000 miles Cars and Vans 45p 25p Motorcycles 24p 24p Bicycle 20p 20p
The mileage allowance covers car servicing and taxes; petrol expenses; insurance charges; and other additional running costs associated with the vehicle. Additionally, congestion charges and car parking charges also form part of allowable expenses.
You can also claim back VAT on the mileage expenses.
Books and magazines bought for business purposes- Many businesses regularly buy or use magazines as well as books for business purposes for which the charges can be claimed by the limited company as a tax-deductible expense. It includes business books, business magazines as well as subscriptions to trade publications. Charges can only be claimed, if business magazines and books are bought or used for research work, reference or training. Daily newspaper is not considered as an allowable expense for business.
Business Insurance like professional indemnity, public liability and employer’s liability insurance- Limited company can claim business insurance expense in case of an exigency or emergencies or unforeseen circumstances and there are various business insurance options available to cover your business and you can choose either one or in combination, depending on the nature, type and size of your business. For example – Professional indemnity insurance.
Car and Vans and Travel expenses- Any cost involved in purchase or maintenance of any vehicle used by a company for business purpose can be claimed as a valid business expense. You can claim car, van and travel expenses only if you meet the following conditions given below –
a. If you are responsible for paying travel cost.
b. If it is mandatory for you to travel for work purpose.
c. The journey you complete should be between home and a temporary workplace. Ordinary community is not eligible for claim.
Business expenses you can claim
a. Vehicle insurance
b. Fuel charges
c. Parking charges
d. Repairs & servicing
e. Vehicle license fee
f. Hire charges
g. Hotel rooms
h. Bus, train, air & taxi fares
i. Meals on overnight business trips
j. Breakdown cover
Business expenses you can’t claim
a. Travel between home to work place
b. Cost related to non-business driving or travel
Capital allowances on assets and equipment- You can claim capital allowances on assets and equipment, you use in your business. Before claiming capital allowance, you need to meet the below mentioned conditions –
a. Assets should be used by the business continuously and must not include goods purchased for resale.
b. Assets should have expected life or a serving period of at least 2 years.
c. Assets should only be used for business purposes.
Charitable donations made by company- A limited company can claim tax relief on charity by donating the following –
b. Land, property or shares in other company (shares of your own company will not qualify)
c. Equipment or trading stock (Items manufactured or sold by your company)
d. Employee (On secondment)
e. Sponsorship payment
Childcare cost expenses- As an employee or director of a limited company, the company could provide you with childcare vouchers, if you were registered under the company’s scheme before 4th October 2018. The scheme has been closed for new entrants after this date. The childcare voucher scheme has been replaced by the Tax-free Childcare Scheme. The cost of providing workplace nurseries to employees can also be claimed as a business expense.
Christmas party & staff event expenses- Christmas party is a party given to the employees as a reward for their hard work every year at Christmas festival and can be claimed as a business expense by the limited company. A limited company must adhere to certain guidelines in order to get exemption from party expenses at Christmas every year –
a. The party must be an annual event, such as a Christmas / New Year / summer party.
b. All employees in the organisation are invited to the party (not Shareholders).
c. The cost of all these parties combined must not exceed £150 (including VAT) per head.
d. All expenses such as catering, venue booking, entertainment, decorations, etc. are included.
Clothing expense- Cost of your everyday wear is not a part of a valid business expense. However, if you are required to wear a particular type of uniform for your office or protective clothing, (to make you feel safe from risk as per the nature of job) then it can be classed as a valid business expense and deductible for tax purposes. This includes cost of hiring and laundering.
Company incorporation charges and pre-trading expenses- The cost of incorporating the company can be claimed as a business expense. This can also include certain expenses which you incurred prior to setting up the company like meeting clients, phone bills or equipment costs. In case these expenses are made within 7 years of your first day of business and have a reasonable cost, you can claim them as your business expense once the company is setup.
Entertainment & hospitality expenses- The cost of business entertainment is not deductible as a business expense for tax relief. Only limited entertainment expenses are allowable, at trade fairs for example, or to entertain a business client from overseas. You should ensure these expenses are paid for/by the company and solely for the business-related purpose.
Equipment for limited company- Costs/expenses incurred in purchase or maintenance of computer equipment’s, laptop, hardware’s, printers and software can be classed as a valid business expense. Equipment also includes fixed assets purchased for business purposes such as furniture, chairs etc. can be claimed as a tax relief. The equipment purchased should be for business purposes and as long it is not intended for personal purposes or the personal use is insignificant, it will not be treated as “Benefit in kind”.
Eye tests and glasses- If you work regularly in front of laptop/monitor or any kind of display screen, you can have your eye tests paid by your limited company. For example – Eye tests for directors & employees. Limited company can claim this cost of eye test as an allowable business expense. The cost of glasses can also be claimed in circumstances where the test results prescribe for it is worn when working on display screen or monitor.
Food and Subsistence when travelling for business- This is the area in which the unwary can fall foul. Remember that the meal rates kick-in when you are away from your office/home for a period of over five hours or more, not when you pop five minutes down the road for a sandwich. The food and subsistence expenses are usually allowable if the travel is an allowable expense. Tax relief can be claimed for the money you have spent on the food or overnight expenses while travelling to a temporary location for work purposes. The expenses on which tax relief can be claimed are as follows –
a. Food and drink charges
b. Public transport expense
c. Parking fees
d. Hotel accommodation (If staying in a hotel overnight)
e. Business phone calls & printing costs
f. Congestion charges & tolls
Minimum Trip time Benchmark allowance 5 hours £5 10 hours £10 15 hours £15
Gifts and trivial benefits provided to employees- You can claim tax relief on business gifts and trivial benefits, if you meet the below basic conditions –
a. The benefit provided by the employer to the employee should not be a cash or a cash voucher.
b. Each benefit provided by the employer to the employee should not cost more than £50.
c. The benefit provided should not be a part of any contractual obligation.
d. The benefit provided should not be for recognition of employment duties performed by the employee.
General office purchases- A limited company can easily claim small purchases made by offices such as office stationery, postage and computer accessories. If an employee pays for stationery personally which is needed for work purpose, the cost can be reimbursed.
Home-office costs or Use of Home as office expense- In case you spend most of your time at your home office, you can claim the additional costs incurred on electricity bill, broadband charges, telephone bill, metered costs of gas and water as a result of working from home. However, if the additional costs cannot be reasonably ascertained then the company can only reimburse £6 per week or £26 per month (from 6th April 2020) for use of home as office. HMRC will not consider this as “Benefit in kind” and therefore you don’t have to pay any tax. Alternatively, you can rent your personal home space to your limited company and charge market rent for using the space. The company can claim this as an expense, but you need to declare these earnings on your self-assessment tax return after deducting the expenses. Before renting your office to your limited company, you need to do the following –
a. Record the board minutes.
b. Create a rental agreement between you and your limited company.
c. Make sure that the rent of the office place should specifically be used certain times of the day.
d. The rent charged should be commercial.
Hire purchase agreement- Hire purchase agreement is an agreement made between buyer & seller in which a buyer buys a product on finance by paying an initial down payment to the seller, but the legal title remains with the seller until the buyer pays the remaining amount. Hire purchase agreements can be claimed easily by the limited company as long as it is in the company name.
Mobile, telephone, landline and broadband expenses- A limited company can claim tax relief on all telephone, landline and broadband expenses. Even cost of providing one mobile/private phones to each employee can be claimed. The contract of the phone must be in company’s name.
Medical or health insurance and private health check-up- Medical and Health insurance can be classed as a valid business expense and can be claimed through your limited company. However, the policy needs to be a specific Permanent Health Insurance (PIH) Policy. This policy needs to be arranged by your company and payments should go through the company’s bank account. The Provision of health insurance is considered as benefit in kind and employee needs to pay personal tax on it whereas limited company also liable to pay NIC at 13.8%. Private health check-up is a benefit provided every year to the employees working for a limited company. Because of this benefit, Directors & employees are eligible to claim cost of one health assessment or health screening every year. It will not be considered as “Benefit in kind” as per HMRC guidelines.
Professional Subscriptions and professional fees- In case you are a part of a professional or trade association and it is of an advantage to your business, you can claim this cost against corporation tax. It should be HMRC approved professional body and directly relevant to your employment. Professional fees are fees paid to professionals such as accountants, solicitors, architectures etc. for the services provided by them to the limited company. In case you have made any payment to a professional as a part of your business, you can claim it through your limited company, provided it is not capital in nature and directly relates to the trade. Do make notes of the reasons for these costs as sometimes you need to deal with exceptions as well.
Pension contributions for employees and directors- Amount contributed by the company to the pension pots of employees are called pension payments. For the tax year 2020/21, the company or you can claim tax relief on your annual pension contributions of up to £40,000. Costs incurred in providing pension advice to an employee are eligible for exemption up to £500 in a tax year. There is no benefit in kind for the employee.
Relocation expenses- Relocation expenses are the expenses incurred by the employee at the time of relocating from one place to another due to much daily travelling distance to the office. Limited company can claim this as a tax relief for the following expenses –
a. Moving from one place to another
b. Buying or selling home
c. Buying items/furniture for new home
d. Loan processing fee
e. Other Miscellaneous expenses
Relevant Life Insurance- Being a director of a limited company, you can enjoy valuable tax benefits, if the premiums for your life insurance are paid by your company instead of from your personal income after tax making it more affordable to have the right insurance in place to protect your family. Relevant Life Policies are not only open to you, they are the perfect employee benefits solution for small businesses, allowing you to offer your employees both life insurance and a wide-ranging benefits package that not only rewards them but help them to live life well. Its set up by the company and pays out tax-free, lump sum on the death (or diagnosis of a terminal illness) of the person insured. The proceeds go directly to the employees family or financial dependants which is good for you as well as for them. Healthy employees are likely to be more engaged, takes less time off sick and be more productive. It will also help you to attract and retain the best people.
Salaries- Amount of salary paid to an employee or a director is considered as an allowable business expense. If you are paying tax efficient salary to your employees up to the national insurance threshold limit, you don’t have to pay NIC but after crossing the threshold limit, you have to start paying NIC to HMRC (currently £9,500). You can be more tax efficient by paying lower monthly salaries to employees.
Stationery, postage and printing costs- Stationery and printing costs such as postage, stationery supplies, printing and printer ink etc. used for business purpose can be classed as a valid business expense and can be claimed through your limited company without considering it as a taxable benefit.
Training expenses through your limited company- Training required to complete the work effectively are usually exempt. In case of overseas training, HMRC will only consider overseas training permissible if a contractor is able to prove that it is completely necessary to undertake the said training in order to carry out the duties. Costs for overseas training will not normally be allowed unless a contractor can clearly demonstrate the following:
a. Prove that the trip is official and not personal by providing a schedule which gives details of the events involved
b. Convince that the nature of the training is completely fundamental to the duties performed by a contractor and that they could not be performed without undertaking the training.
Please note the article is for information purposes only and does not constitute any advice. For more information on what you can claim, please speak to us on 03300 88 66 86 or you can also e-mail us at firstname.lastname@example.org