What are allowable expenses for a limited company?
Mon, 20 Feb 2023
Here at SME Loans, we’re proud to be a leading UK loan provider for SMEs. With a range of lending options, we’re here to help our customers grow their businesses.
Because we want to see our customers thrive, we share tips and advice on running a small or medium-sized business. In this article, we will look at claiming expenses as a limited company and what you can and can’t claim for.
As the owner of a limited company, you can claim tax relief on certain allowable business expenses.
Allowable expenses are the essential costs that keep your business running. Overheads – such as stationery and insurance – are tax deductible, meaning that you can offset them against your annual profits so that you don’t pay tax on the money you’ve spent.
For example, your limited company makes a profit of £40,000 in a year but spends £5,000 on allowable expenses, therefore your annual tax bill is based on £35,000.
Only certain costs can be put down as a business expense. Of course, you’ll want to keep your business tax efficient, but in order to ensure you don’t accidentally underpay tax, it is vital to understand what constitutes limited company allowable expenses.
Rules about what are allowable expenses for a limited company
The golden rule on what expenses you can claim for your limited company is that they must be incurred wholly and exclusively for the running of your business – not for personal purposes.
You can deduct the following legitimate business costs from your annual profits in order to reduce your tax liability. In addition, you must report any item you make personal use of, as a company benefit. Limited company expenses you can claim include:
- Eye tests
If screen-based work is a large part of the job, you and your employees may claim eye tests as limited company expenses.
- Business insurance
The cost of your company insurance policies – including public liability, business contents and professional indemnity – can be claimed, as long as it is strictly for business purposes.
- Advertising and marketing
Investing in marketing your business can be claimed as a limited company expense.
- Use of home as office/workplace
If your home is also your business office you may claim a percentage of your household costs and utility bills as business expenses.
- Professional subscriptions
Specific subscriptions for relevant industry journals and books can be claimed as a limited company expense.
- Phone bills
Company phone contracts and broadband can be claimed fully as a limited company expense if used solely for business purposes. If it’s a personal contract then you can separate the bill and claim for business-related usage only.
- Annual staff parties
Entertaining employees can be claimed as a business expense (certain conditions apply).
- Business equipment
Anything from a computer and software to printers or office furniture can be considered necessities and claimed as company expenses.
- Professional development
Training courses can be claimed as limited company expenses as they are an investment in your business.
- Transport and travel
If travel is necessary for work purposes and you need to be present at a destination, the following can be claimed:
Car, van and bicycle mileages
Vehicle repairs and servicing
Public transport including trains, buses, flights and taxis
- Overnight business trips
You can claim expenses for hotel rooms (within reason), as well as food and drink on overnight business trips.
- Startup costs
Limited company start-up costs can be claimed for up to seven years before a company begins trading. Typical expenses include computers, broadband, domain name fees and websites and related travel costs, plus professional services, e.g. advice from solicitors or accountants.
The vast majority of company expenses can be offset against your corporation tax bill – although there are some exceptions – more to follow. If you’re concerned about claiming expenses as a limited company, get in touch with a reputable accountant for advice and guidance.
What is not considered an allowable expense?
Just as important as the limited company expenses you can claim are those you can’t. Essentially, you should keep in mind that all costs must have been incurred exclusively for the running of your business. This means that you cannot claim for business costs that are also associated with a personal benefit.
Childcare isn’t directly linked to your business function and so can’t be counted as an expense.
- Certain travel expenses
You can only claim for business trips and not for daily travel between home and work. If you extend a work trip for pleasure then you can only claim for the business element.
Generally business entertainment isn’t an allowable expense against profits. However, if you are required to spend your own money on business entertainment as part of your role as a limited company director, you may be able to claim it as a business expense.
When it comes to staff costs, you can claim for a personal assistant but not – say – a cleaner or nanny, as these are considered a personal benefit.
Expenses are a complex part of tax, partly because they can be subject to false claims. If you’re unsure about what allowable expenses your limited business can claim, consult your accountant for support.
How to claim for allowable business expenses for a limited company
While you don’t have to send in receipts with your annual tax return, it is critical that you keep records of all your expenses. In the event that HMRC needs to inspect your accounts, you will need to show records and VAT receipts as proof of your business expenses. Sometimes HMRC can go back a number of years during an investigation.
You can either pay your limited company’s expenses straight from your business bank account or pay personally and reclaim as a reimbursed expense. Any of your employees can claim expenses, so you should have a company expense policy and claim form to ensure there is clarity around what can and can’t be expensed.
Growing an efficient and successful limited company
We hope that providing clarity of what are allowable expenses for a limited company will enable you to be as tax efficient as possible.
SME Loans provide a range of lending options tailored to start-ups and small businesses. To find out more about our business loans for limited companies, please visit our dedicated page or get in touch on 01244 506279 and speak to our helpful advisors today.