For a business owner, the efficient management of finances is highly crucial for the success and growth of a limited company. Also, maximising the profits and minimising the tax liabilities remain the constant focus for a director. Thus, by knowing the allowable expenses for limited companies, you can significantly reduce your company’s taxable profits.
In this blog, we will thoroughly explain all the allowable expenses for limited companies which you can claim to reduce your taxable profits, which, in turn, will reduce your corporation tax. Furthermore, to learn more about corporation tax, you can read our blog:
What is corporation tax and how it works for limited companies?
What are the allowable expenses?
All the mandatory costs that are directly associated with operating and running a business are called allowable expenses. Fortunately, being a limited company owner, you can subtract or exclude these expenses from your company’s income when calculating the taxable profits. Subsequently, you can claim corporation tax relief through these allowable or tax-deductible expenses.
What are taxable profits for limited companies?
Taxable profits for limited companies refer to the net or gross income that a company pays its tax on after considering all the allowable expenses and deductions.
Moreover, taxable profits include the income your company produced from trading activities, investments, and other sources. Taxable profits of limited companies are subject to the corporation.
The bigger your company is, the more profit it is likely to generate. Consequently, the more corporation tax it shall have to pay. Notably, taxable profits exclude the costs incurred in running the business, such as salaries, rent, and operational expenses.
Lastly, it is vital for limited companies to accurately calculate their taxable profits to ensure compliance with HMRC tax regulations and determine the amount of corporation tax due to the government.
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What are the fundamental rules for claiming the allowable expenses for limited companies?
There are a few fundamental rules to remember with tax-deductible expenses because only then will you most likely be able to claim them.
- You can only claim the expenses you spend purely and exclusively for business or work-related purposes. For instance, these are the expenses that you incur while running your limited company.
- The costs for dual or multiple purposes, like personal use, do not fall under the allowable expenses.
- You must pay all business expenses through your business account to claim them.
- By claiming tax-deductible expenses, limited companies can considerably reduce their corporation tax liability. However, not all the expenses are allowable.
- You must maintain accurate and up-to-date records that detail all operating costs and expenses. Likewise, you must keep copies of all relevant VAT receipts and documentation to substantiate your claims.
What are allowable expenses for limited companies?
Allowable expenses for limited companies are the legitimate business costs that you can deduct from your income or profits before calculating your corporation tax.
However, the key to claiming the allowable expenses is that they are spent purely and exclusively for business purposes. Only then you will most likely be able to claim them.
The following are the costs you can claim as allowable expenses:
Company formation costs:
All the costs you incurred while setting up a limited company, including its registration are 100% allowable.
Office equipment:
All the office equipment or products that are crucial for the execution of day-to-day tasks of the business are among the allowable expenses for limited companies. They include everything from company laptops, printers, scanners, consumables, chairs, desks, office stationery, and all the other commodities necessary for the office.
Advertising, marketing and public relations expenses:
Marketing, advertising, and PR activities are focused on the promotion of your products and services to your target audience. Hence, a one-time cost or an ongoing fee is a claimable business expense if you have used the investment exclusively for business purposes.
You can claim the costs of business trips, including accommodation and food costs, as allowable expenses for limited companies. Aside from that, you can also claim parking costs, road tolls, and other travel-related expenses provided you paid them while using a vehicle for business reasons.
Accommodation costs while on a business trip:
Consider a scenario where you are on a business trip and need to temporarily stay overnight on location, such as a hotel. Subsequently, you can claim the accommodation costs as a tax-deductible expense.
Nevertheless, bear in mind that this expense is reasonable because HMRC can question you regarding any excessive claims for luxury hotels or apartments with more than one bedroom.
Likewise, the costs incurred for the food and drinks you have bought are also claimable as travel and subsistence costs.
Premises rental costs:
The cost of renting out your premises for business purposes is an allowable expense.
Phone and internet (broadband) bills:
Work phone contracts and broadband bills can qualify for claiming back. If your mobile phone contract is in your company’s name and you use it strictly for business purposes, the entire bill falls under the tax-deductible business expenses.
In addition, if it is a personal contract, you must separate the business and personal use so that you can claim the business expenses only.
Work from home:
If you conduct your business activities in a work-from-home setup, you can claim a percentage of your household and utility bills as business expenses. It also includes the energy bills and other costs associated with printing and posting.
Employee salary:
You can opt to pay yourself a salary as a director of a limited company, just like an employee of your company. You can then claim the salary and the corresponding National Insurance Contributions (NIC) as allowable expenses. However, take note that once you reach the National Insurance threshold, you will have to start paying NICs.
Professional fees:
You can claim back professional fees, such as legal and accounting fees if you have taken them for the facilitation of your business affairs (tax filing and returns).
Insurance policies:
You can claim the costs of any business insurance policy since it is among allowable expenses for limited companies. It includes crucial coverage, such as professional indemnity insurance, which protects your company against claims of negligence or misconduct, and public liability insurance, which covers legal liability for injuries or damages to third parties.
After reaching an agreement with a pension provider, you can contribute to your pension fund and claim 100% tax relief as a tax-deductible or allowable company expense. However, remember there is a limit to the amount of money you contribute tax-free to a pension scheme through your business or personally.
Bank and financial charges:
Fortunately, if you have a business account or card in the name of your limited company, you can claim expenses on bank fees linked with this account.
On the contrary, If the bank charges or fees are associated with your personal accounts, they are not claimable or allowable expenses for limited companies.
Similarly, you can claim business expenses for bank charges, leasing payments, Interest on business loans and finance agreements, hire purchase interest, and alternative finance payments (like Islamic finance).
Eye test expenses:
Your company staff can claim eye tests and health checks as allowable expenses, considering they spend a significant amount of time on computer screens. Besides, the costs incurred on prescription glasses or contact lenses are tax-deductible. However, it will hold only if they are solely used for screen-based tasks as a part of their job.
Professional subscriptions:
Professional or business-specific subscriptions and memberships may also be considered an allowable expense. But, you must be able to show their benefit to your company. More importantly, you must deduct the costs directly from your business bank account.
How do I claim allowable expenses?
First and foremost, it is mandatory for you to keep accurate records of all the business expenses your limited company has incurred, in particular the allowable ones. Without correct record keeping, HMRC might turn down your expense claim.
As a result, you won’t qualify to claim tax relief. Therefore, you must have all the relevant invoices and receipts in your records to validate your claims.
If your limited company is established and large, it is likely to have numerous expenses to keep track of. Hence, it is wise and efficient to appoint an accountant to manage your bookkeeping affairs on your behalf.
Can I claim buying assets as a business expense?
If you are buying assets for your limited company, this sort of buying is classed as a capital expense, and it is in contrast to business expenses.
Notably, capital assets are things that you can retain and utilise in your business. For instance, some vehicles like plants and machinery (excluding cars). Hence, while capital assets are non-tax-deductible and you cannot claim them back, you can claim capital allowances against the cost of buying these.
Beyond that, with the Annual Investment Allowance (AIA), a limited company can spend up to £1 million per year on its new assets and then subtract that cost from its taxable profits. Lastly, you can also claim a 100% first-year allowance, which allows you to claim back taxes on an asset in the same year you purchased it.
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What can’t you claim as a limited company expense?
The following are the costs you cannot claim as a limited company expense:
Personal expenses:
As mentioned previously, if you incur any expenses that are primarily personal, they are not deemed an allowable expense.
Personal account fees and charges:
All the charges and fees connected with your personal account cannot be claimed as a limited company expense. It also includes regulatory non-compliance fines, loan amounts, late payment penalties, and arranged overdrafts.
Donations not made through Gift Aid:
With the Gift Aid scheme, you can increase the value of your donations via tax relief. On the contrary, if limited company donations are not made through this scheme, they are classed as non-allowable expenses.
It shows you cannot deduct these contributions from your taxable profits to reduce corporation tax liability. Therefore, limited companies should use the Gift Aid scheme when making charitable donations to optimise their tax efficiency.
Fines and penalties:
If your company faces any penalties as a result of any regulations breach, non-compliance, misconduct, or punitive actions, you cannot claim these fines against tax-deductible expenses. It is because these fines are not directly associated with your company activities, like the costs spent on the equipment or other work-related commodities, which are necessary.
Asset depreciation or growth:
Usually, capital assets typically depreciate with the passage of time. Yet, you cannot claim this depreciation among the allowable expenses for limited companies. Moreover, any improvements or renovations made to these assets cannot be claimed either. However, you can claim any costs you have spent for necessary repairs, like fixing utilities or maintaining the asset’s working.
Entertainment purposes:
If your company incurs any costs for potential client entertainment or hospitality, for example, dining them in fancy hotels, winning them, and offering them high-end gifts, it is a non-allowable expense. It is worth pointing out that such activities are purely unrelated to your business or for yielding income for the company.
Gifts for clients:
Like the client entertainment, It is a widespread false belief among the limited company directors that gifts to clients fall under tax-deductible expenses. Nonetheless, only the gifts whose worth is under £50 can be claimable. In addition, these gifts cannot include drinks, tobacco, food, or anything carrying an advertisement for your limited company.
Income paid as dividends:
As stated above, as a director, the salary you pay to employees, including yourself is among the allowable expenses for limited companies. However, dividend pay-outs, which are profit distributions to shareholders, including directors are not tax-deductible expenses.
Eventually, although salaries can help lower your company’s corporation tax, dividends are not advantageous in terms of reducing corporation tax since they are paid from after-tax profits.
Make your expenses tax-efficient with Accountingfirms:
The entire process of keeping your taxable profits low becomes straightforward with the help of an accountant listed on Accountingfirms. A proficient accountant will manage all your tax affairs on your behalf so you won’t have to worry about ensuring compliance with HMRC.
Moreover, the accountant will maintain a precise record of all the expenses, allowances, and tax reliefs you can claim to effectively reduce the amount of corporation tax. Hence, visit Accountingfirms today to get your business matters in perfect order.
Conclusion:
Being sharp with your expenses plays a crucial role in your company’s success whether you have been running a limited company for a long time as a seasoned director or have just set it up and are running it as a director for the first time.
You can considerably cut down your taxable profits by knowing all the allowable expenses for limited companies, what you cannot claim as a business expense, and how to maximise dividend allowance.
Also, to know more about tax-efficient ways to minimise your corporation tax, read our detailed guide: How to reduce the corporation tax bill for a limited company?
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.