A Guide to Learn LLP Allowable Expenses to Reduce the Tax

Like every other business structure in the UK, a Limited Liability Partnership (LLP) is not immune to tax obligations. Yet, an LLP can be a tax-efficient business structure when managed effectively. Notably, one of the key ways LLPs can minimise their tax liability is by claiming allowable business expenses. According to HMRC, allowable or tax-deductible expenses are costs that are wholly and exclusively incurred for the purpose of running the business. Also, by figuring out what the LLP allowable expenses are, LLP members don’t overpay on their tax bill while staying compliant with tax rules. Accordingly, this guide will list the LLP allowable expenses and how they can be claimed to help members reduce their tax bill.

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Understanding the LLP allowable expenses?

An LLP incurs an array of expenses as part of its routine operations. These costs vary greatly depending on the type of business. However,  they all have one thing in common: they are the mandatory costs that are directly associated with running a business efficiently and effectively. 

In compliance with HMRC regulations on partnerships, for an expense to be allowable as a tax deduction, it must be incurred (typically paid) by the partnership for the purpose of the LLP’s trade or property business, and it must meet the normal tests for allowability.

It is also worth underscoring that an expense incurred on carrying out the LLP’s business will typically be included in the LLP’s accounts. To elaborate, an LLP reports its allowable expenses in its annual accounts.

These expenses are deducted from the LLP’s income/profits to arrive at the taxable profit. For your greater clarity, the annual accounts are prepared and filed with Companies House and provide a detailed financial picture of the LLP, including its income, expenses, and profits.

Moving on, an LLP’s taxable profits are determined by subtracting allowable expenses from the total income. Next, the LLP members are taxed individually on their share of the partnership’s profits.

Essentially, every LLP and each of its members must file an annual tax return through Self Assessment. Now, it is utterly significant to highlight that LLP members cannot claim the allowable expenses on their individual self-assessment tax return in the same way as self-employed individuals can. On the contrary, all allowable expenses must be included in the LLP accounts.

What are the LLP allowable expenses?

Understanding which expenses are tax-deductible is crucial for effective handling of an LLP’s financial aspects, the prime of which is tax optimisation. Accordingly, the following is the list of what qualifies as an allowable expense for an LLP under the HMRC guidelines:

Operational Costs:

Operational expenses include the day-to-day costs related to the operation of the business. These include:

• Rent for business premises.
• Utility bills (if the LLP operates from a separate office).
• Business rates and insurance.
• Procurement of office supplies (e.g. stationery, printer cartridges).

Moreover, if the LLP members carry out their responsibilities through a work-from-home arrangement, they might claim a proportion of home utility costs.

Staff salaries and subcontractors:

An LLP may employ staff or use subcontractors to accomplish its crucial routine tasks. Hence, this category of LLP allowable expenses includes employee-related expenditures ranging from recruitment to salary, such as:

• Salaries and wages.
• Employer’s National Insurance contributions.
• Pension contributions (qualifying under auto-enrolment).
• Costs incurred on employee training and development.
• Freelancers and contractor payments.

Professional fees and consultancy costs:

Professional services that support business operations are allowable, such as:

• Accountant and legal fees
• Consultant charges
• Licensing and registration fees

Learn more about how an LLP works by reading our guide:

How to set up an LLP in the UK? A comprehensive guide.

Travel and subsistence costs:

Travel-related costs constitute another significant part of LLP’s allowable expenses. Generally, LLP members can claim back the travel costs incurred for business purposes, such as:

• Public transport fares.
• Expenses incurred for flights, hotels, and rental cars.
• Vehicle mileage (45p per mile for the first 10,000 miles, 25p thereafter as per HMRC). To explain, when an LLP pays its employees an amount towards the mileage costs, these reimbursements/compensations are called Mileage Allowance Payments (MAPs). Mileage Allowance Payments are paid to employees for using their own vehicles for business-related travel. Now, HMRC allows an LLP to pay its employees a certain amount of MAPs each year without needing to report them to HMRC. This is called an ‘approved amount’. To calculate the approved amount and learn more about MAPs, refer to the government website.
• Parking and tolls.
• Meals and accommodation (for overnight business travel)
• Costs related to client meetings.

However, ordinary commuting from home to a regular place of work is not an allowable expense.

Marketing and advertising costs:

Marketing and advertising activities are indispensable for expanding an LLP and reaching the potential audience. These can include a variety of strategies, such as online advertising, social media campaigns, content marketing, and event sponsorships.

These marketing and advertising activities are in sync or align with the LLP’s industry, target audience, and business objectives. Therefore, all expenses aimed at promoting the business are usually allowable, including:

Website development.

• Social media advertising.
• Print and media advertising.
• Business cards, brochures, and flyers.
• Costs related to SEO and digital marketing.

Training costs:

Often, an LLP might require the training of the employees relevant to the existing business activities to ensure the smooth execution of operational activities. As a result, this category falls under the LLP allowable expenses.

For example:

• CPD (Continuing Professional Development).
• Industry-related courses.

While allowable expenses are instrumental in bringing down your LLP’s tax bill, it is equally important to know the tax liabilities of its members and how they get paid. To your advantage, our following guides discuss these subjects at length:

What are the tax responsibilities of LLP members?

How do LLP members get paid in the UK? Learn the essentials.

Use of the home as an office:

When learning what LLP allowable expenses are, it is also necessary to learn if the costs incurred when working from home can be claimed. If LLP members are in a work-from-home arrangement, a reasonable portion of home expenses can be claimed, based on the proportion of their home being utilised for carrying out business activities.

These include:

• Council tax.
• Electricity and gas.
• Mortgage interest or rent.
• Internet and phone charges.
• Household repairs.

The work-from-home expenses can be calculated based on the number of rooms used and the number of hours spent working at home.

How claiming LLP expenses can help reduce tax liabilities?

By claiming allowable expenses, LLP members can reduce the LLP’s overall taxable profit. Consequently, it will lower the income tax,  Class 2 and Class 4 National Insurance contributions owed by members.

For example, if an LLP has income of £60,000 and allowable expenses of £20,000, only £40,000 is subject to tax. Now, if the LLP has two equal members, each will have to report £20,000 on their self-assessment tax return.

Importance of record-keeping and documentation:

It is worth noting that LLP members must maintain accurate records of all the tax-deductible expenses they are claiming the relief on, alongside correct calculations for the business proportion of those expenses.

It is because the upkeep of these records is not only mandatory to align with tax regulations but also facilitates a streamlined monitoring of your LLP’s financial well-being.

Further, accurate documentation is vital in validating your LLP’s eligible expenses. Subsequently, the LLP members must maintain well-organised records, such as:

• Receipts and invoices.
• Separate business and personal expenses.
• Bank statements.
• Payroll records.
• Contracts and agreements.

Lastly, LLP members will include these expenses when preparing the LLP’s annual accounts. Each member will then report their share of profit/loss via their Self-Assessment return.

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Key takeaways on LLP allowable expenses:

• Allowable expenses are costs that an LLP incurs exclusively for business purposes. 
• For LLPs, these expenses can be deducted from the partnership’s income before tax is calculated. 
• The lower the taxable profit, the less tax is payable by individual members through their Self-Assessment tax returns.
• Per HMRC, the permissible expenses must be included in the LLP accounts and be supported by accurate records, such as receipts, invoices, mileage logs, etc.
• Non-allowable expenses, such as personal expenses or capital costs without capital allowance claims, should not be included in the annual accounts.

Conclusion:

In essence, knowing the LLP allowable expenses can significantly reduce your LLP’s overall tax burden while keeping your business HMRC-compliant. Yet, in view of the frequently changing tax regulations and the unique business nature of every LLP, it is always a rational practice to count on a professional accountant to ensure you claim the right expenses and optimise your tax position.

At Accountingfirms, the registered and experienced accountants can be of adequate help to you if you want your LLP’s obligations met efficiently and seamlessly. The certified accountants on our platform can effectively manage your LLP’s obligations, i.e., from business registration to tax payments, annual accounts, and capital allowance claims.

Therefore, whether yours is a new LLP or you are looking to streamline your current tax strategy, our location-based and amazingly affordable professionals can support you with comprehensive consultation specifically tailored to your business preferences. Thus, ensure effective tax planning and compliance with HMRC with Accountingfirms.

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.