Limited Company Expenses
uLTIMATE gUIDE
What expenses can I claim as a limited company?
There are often business expenses that go unclaimed, which means you could end up paying more tax than you need to. We’ve put together this article to help you make the most of the tax relief available to you.
The general rule is that expenses must be “wholly, exclusively and necessary” for business purposes. However, HMRC rules can be complex and are often based on concepts such as the ‘fairness’ and ‘reasonableness’ of expenses claimed. There may also be an impact on the amount of personal tax you pay.
In this article, we’ll discuss all the main types of HMRC-approved business expenses you can claim as a limited company for tax purposes.
What is tax relief for limited companies?
Allowable business expenses reduce the amount of profit on which limited companies pay Corporation Tax. So, more allowable expenses means less taxable profit and less tax to pay. As you always want to keep on HMRC’s good side, you need to make sure you only claim for expenses that are on HMRC’s approved list.
To account for your expenses properly, you need to keep accurate records of everything. Bear in mind that you’re legally bound to keep these records for at least six years.
As ever, HMRC rules on what is tax-deductible can be complex and are often based on concepts such as the ‘fairness’ and ‘reasonableness’ of expenses claimed.
Claiming expenses as a limited company
You can either pay your company’s expenses directly from the company business bank account or as a ‘reimbursed expense’ when paid by you personally. It’s important to remember to keep an accurate record any time you reimburse yourself from the company funds.
If you run a small business, your employees can also claim expenses, so it’s good practice to have a company expense form and policies – i.e. how much employees are allowed to spend and in what situations – and collect and file all the expense claims at the end of each month.
Most common expenses
This is a full breakdown of the most common expenses you might want to claim for.
Advertising, marketing and PR
One-off fees for advertising and marketing services are allowable. Taking a client out for lunch, whilst sometimes falling to the marketing team, is classed as entertainment and isn’t allowable.
Business trips and travel
You can claim business mileage, accommodation and subsistence costs as an expense. In addition to mileage and accommodation, you can also claim parking costs, road tolls, congestion charges etc – as long as they were incurred when using a vehicle for business purposes.
Entertainment
The costs associated with entertaining clients are not classed as allowable expenses. However, you CAN claim the costs of entertaining staff. Entertaining staff is allowable only when the total cost is less than £150 per annum.
Formation costs
The costs of forming a limited company, including things like registering a domain, are 100% allowable.
Professional fees – accountancy, legal etc
Provided the service is wholly to your business, you can claim 100% as an expense
Phone and broadband
Phone and broadband bills owned by the business and used solely for business purposes are allowable expenses.
Premises
The cost of renting your premises for business use is an allowable expense.
Subscriptions
Professional subscriptions and memberships might be classed as an allowable expense – but only if you can demonstrate a benefit to your business. The costs must come directly out of the business bank account.
Training courses
Only when training is relevant to your business.
Work clothing
If your business requires specific uniforms or specialist clothing, you may be able to claim relief. The rules can be tricky, however, so consult HMRC if in doubt.
Accommodation costs and expenses whilst on business travel
You can claim expenses for accommodation costs when you travel to a temporary workspace or location for business-related purposes, providing the expense is reasonable and not excessive. HMRC will likely question any excessive claims for expensive hotels or apartments with more than one bedroom.
Bank, credit card and other financial charges
Many types of bank charges can be claimed as an allowable business expense, though they must be for accounts or cards in the name of the business. You can claim business costs for:
- Bank, overdraft and credit card charges the interest on business and bank loans (but not repayments of the capital or loan amount )
- Hire purchase interest
Leasing payments
Alternative finance payments, for example, Islamic finance.
You cannot claim for repayments of personal loans, overdrafts or finance arrangements.
Business Insurance policies
You can claim for any insurance policy for your business, for example, professional indemnity insurance or public liability insurance.
Business mileage expenses
If you’ve used your personal car or van to get to a temporary place of work and paid for the fuel personally, you’re entitled to get this back from your company. You can even claim mileage expenses if you ride a bike. But no matter how you travel you cannot claim for miles commuting to your regular workplace.
If your company owns the car, however, you can only claim the cost of fuel.
If you use your personal vehicle for business travel to a temporary workplace or location you can claim the following rates:
Cars and vans
- 45p per mile on first 10,000 miles in tax year
- 25p per mile on each mile over 10,000 miles
Motorbikes
- 24p per mile on first 10,000 miles in tax year
- 24p per mile on each mile over 10,000 miles
Bicycles
- 20p per mile on first 10,000 miles in tax year
- 20p per mile on each mile over 10,000 miles
Car, van and travel expenses as a limited company
Your travel expenses are generally tax-deductible where all the following conditions apply:
- You are responsible for paying the travel costs
- The travel you are undertaking is necessary for your work, i.e. your attendance at the place you are travelling to is mandatory
- The travel should not be ‘ordinary commuting’. HMRC defines a commute as the journey you make between your home and permanent workplace.
Things you can claim allowable business expenses for (applicable to company cars only – not personal cars):
- Vehicle insurance
- Repairs and servicing
- Fuel
- Parking
- Hire charges
- Vehicle licence fees
- Breakdown cover
- Train, bus, air and taxi fares
- Hotel rooms
- Meals on overnight business trips
Things you can’t claim for:
- Non-business driving or travel costs
- Fines
- Travel between home and work
Charitable donations as a limited company
Your limited company pays less Corporation Tax when it gives the following to charity:
- Money
- Equipment or trading stock (items your company makes or sells)
- Land, property or shares in another company (shares in your own company don’t qualify)
- Employees (on secondment)
- Sponsorship payments.
You can claim tax relief by deducting the value of your donations from your total business profits before you pay tax.
Christmas party and staff event expenses through your limited company
Your company can host an annual event – most commonly a Christmas party – as a tax-free benefit, providing you meet certain conditions.
Your employees may invite a partner but you must not exceed an expenditure of £150 per head (including VAT). The event must cater mostly for staff. For example, expenses for one director and a plus one would be acceptable and would give you a budget of £300.
However, if those attending are not mostly employees then it would be difficult to argue the event’s main purpose is to entertain staff. Note that the £150 amount is an annual limit and can cover multiple events for staff.
Employee expenses
If your company takes on any employees (and this includes you as a director) then the company will be able to claim their salaries as an expense.
Business expenses that employees incur can be claimed, provided HMRC’s allowable expenses rules are met. You should maintain records of all expenses your company pays in case HMRC asks for evidence of these.
If you have employees, you can claim staff costs including the following:
- Employee or staff salaries
- Bonuses
- Pensions
- Benefits
- Agency fees
- Subcontractors
- Employer’s National Insurance
- Uniforms for employees
- Training courses.
Eye tests and glasses or spectacles
You can claim for vision tests providing it’s necessary for the initial or continued use of visual display equipment in your duties. However, you aren’t able to claim for glasses or contact lenses unless they’re prescribed during your time at work, specifically for ‘monitor or screen work’.
Use of your home as an office when you’re a limited company
If you work from home and operate a limited company, you can claim a flat rate of £6 per week as an allowable expense – this equates to £312 per year. The good news is that HMRC doesn’t require any evidence to justify this expense and doesn’t believe this to be a benefit in kind, which means you won’t have any tax to pay on this through your Self Assessment.
You could also try to claim for extra costs associated with utilities, broadband, contents insurance and more – but you’ll need to separate each cost and identify how it applies to your business and demonstrate receipts and invoices etc.
As always, there are rules: you must be able to prove that you regularly spend time doing your job in this office space, so you can’t just use your home office for a small bit of administration while the majority of your work is done on-site or at client offices.
Equipment that is necessary and essential for your professional duties will receive tax relief. You may also claim reasonable relief towards the cost of equipping/furnishing an office (for example chairs or bookcases).
Renting your home office to your business
If you’re running a limited company, you might be able to rent your personal workspace in your home to your limited company and claim that as an expense. So, as long as you run your business through your limited company, and follow the rules correctly, you may be able to claim more than £312 each year.
To claim a higher amount, you’ll need to set up a rental agreement between you (as the homeowner) and your limited company. If you don’t have this formal agreement in place then you run the risk of HMRC classifying the rent you receive from your limited company as additional salary (from your limited company) which would be subject to tax and National Insurance.
Drawing up a rental agreement is beneficial because your limited company can deduct rental payments from your company’s pre-tax profit, meaning that Corporation Tax will not be payable on these expenses.
When you prepare your rental agreement, you need to keep the following in mind:
- The amount of rent needs to be realistic in terms of commercial value and must be on an ‘arm’s length’ basis. This means that neither party should be disadvantaged by the agreement. So you cannot calculate an amount of rent designed to benefit you as the individual owning your home or to affect the profitability of your limited company
- You shouldn’t have a room solely dedicated to your business as it can have additional implications when you come to sell your house
- A formal rental agreement must be in place and signed on behalf of both parties
- You should consider periodic reviews of the amount of rent paid (for instance an annual review).
Any income you receive as an individual must be included on your personal tax return (Self Assessment) and any profit remaining after expenses will be subject to Income Tax at your normal rate, which may make this a less tax-efficient option for you personally.
Your rental agreement can be used to cover the proportional costs of the rented space. There is no definitive list of allowable expenses – what is allowable depends on the facts in each case. But you can include items such as mortgage payments, utilities and council tax based on the proportion of the property used for business purposes.
How to calculate your allowable rental expenses
When it comes to ensuring a reasonable amount of rent, you need to calculate how much space is used by your business. A practical way to do this is to calculate your monthly outgoings for expenses you are looking to claim, then divide that by the percentage of your rooms being used for business purposes (which should usually be one room).
For example, if you have a house with seven rooms, an office should take up one room, so you calculate the amount of rent based on 1/7th of the eligible expenses. If your office was in use on average seven hours a day you would then calculate 7/24th of the amount, and this is what you would include in the agreement as the rent amount.
However, if you decide to sell your property you may need to pay Capital Gains Tax which needs to be included on your Self Assessment. This is because the ‘business’ part of the sale will not qualify for Private Residence Tax Relief. This is due to your home no longer being fully exempt because an area is being used for business purposes. Capital Gains Tax is applied to any increase in the value of the office area that may have resulted from the company’s occupation of it.
This means that you need to think very carefully about whether a rental agreement is the right decision for you. If you decide to sell your house, you could face a Capital Gains Tax bill on the office part as this will not be covered by the Private Residence Relief.
The calculation for this can be complicated and the Capital Gains Tax liability could be reduced if the office is used by you for non-business use outside office hours. It’s likely you’ll need specialist advice to calculate the amount of Capital Gains Tax you owe to ensure you follow HMRC’s rules.
You’ll need to provide a very good reason for using more than one room for business purposes and evidence that the private use of this space is secondary to the business use. A legitimate situation might be a photography studio with an office and a dark room – remember that if you sell the property, Capital Gains Tax may be payable.
If you do use multiple rooms for business purposes then you should prepare a detailed calculation with supporting evidence. This should follow the process highlighted above. You may even go further and apportion expenses based on the square metres in use.
You may also claim back repairs on your property if they are directly related to, and necessary for, your business.