Understanding the allowable expenses you can claim as a limited company can help you to reduce your Corporation Tax bill.
You can subtract allowable business expenses from your revenue to calculate your company’s profit and therefore the amount of Corporation Tax you need to pay.
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The rules on limited company expenses
As long as an expense is “allowable”, you can deduct it from your revenue to calculate your taxable profit.
Most of the costs you incur from running your business are allowable, such as office equipment, salaries, and business insurance.
If you pay for something that has a combination of business and personal use – for example you take a work trip abroad and then spend a few extra days on holiday – only the business part of the cost is tax deductible.
Generally, any money you spend on entertaining clients or gifts is not allowable, even if it’s a genuine expense of your business.
If you provide benefits or expenses to your employees (including to yourself as a director) such as travel expenses or health insurance, you may have to tell HMRC and pay tax and National Insurance on them. Check the list of benefits on the government’s website.
It’s important to have a record of your limited company expenses so make sure you keep receipts, invoices, and any other important paperwork. You need to keep them for at least six years after you’ve filed your tax return, as HMRC could investigate at any point within this timeframe.
List of allowable business expenses
Most of the costs that you incur to set up your limited company and keep it running are allowable expenses, for example:
- the costs for forming your limited company
- premises costs, like rent and utility bills
- salaries and other staff costs
- the cost of stock or raw materials
- office costs, like stationery and phone bills
- travel and accommodation costs for business trips (but not commuting costs)
- legal and financial costs, like accountancy fees and your professional indemnity insurance premium
- advertising and marketing costs
Although business entertainment costs are not usually tax deductible, you can host a social event for your staff and claim it as a business expense, as long as the cost doesn’t exceed £150 per person, and it’s an annual event (such as a Christmas party) that’s open to all staff.
It’s a bit different if you buy an asset for your business. If you buy something that you’re going to keep and use in your business, like a piece of machinery or a work van, you can claim capital allowances on your tax return.
This means that you can deduct the full value of the item from your revenue before tax, using your annual investment allowance (AIA). The AIA has been temporarily increased to £1 million for the period 1st January 2019 to 31st December 2020.
If your employees incur expenses during the course of their work, ask them for receipts so that you can reimburse them and then include these purchases when calculating your tax deductible expenses.
Remember that normal commuting costs aren’t tax deductible, but you can claim for other staff travel costs, for example if an employee visits a client or goes to a conference.
It’s a good idea to have an employee expenses policy in place so that your employees know which expenses you will reimburse, and they know how and when they’ll be paid back.
Tax can be complicated, and you can face fines if you make a mistake on your tax return, so look at the guidelines on the government’s website and seek professional advice from an accountant.