In our last blog, we looked at the kind of expenses you can claim against tax when you’re self-employed. This month let’s look at Limited Companies. If you’re a Director of a limited company, then, of course, this is something your company needs to get right.
After all, with a close understanding of the allowable expenses, you can claim as a limited company, you’re far more likely to reduce your Corporation Tax bill.
What are the rules on limited company expenses?
Provided an expense is “allowable”, you can deduct it from your revenue to calculate your taxable profit.
This applies to most of the costs you incur from running your business. Examples include office equipment, salaries, and business insurance.
This is pretty straightforward. But what 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? This is where things can get tricky and you have to be careful – and honest! Only the business part of the expense is tax-deductible.
This one might surprise you. Generally, money you spend on entertaining clients or gifts doesn’t count as an allowable expense, even if it’s a genuine business expense.
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. You’ll find a full list of benefits on the government’s website.
Keep your paperwork for a minimum of 6 years
It’s vital to keep a proper record of your limited company expenses. Be sure to keep receipts and invoices, as well as any other relevant paperwork. You may want to cut down on paper storage. In today’s digital age, you can keep your paperwork online, in the cloud. But it’s your responsibility to make sure everything is properly secured and backed up. You must keep them for a minimum of six years after you’ve filed your tax return. HMRC might investigate at any point within this time window and you’re obliged to keep the paperwork.
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. Here are some key examples –
- the costs of forming your limited company
- premises costs, like rent and utility bills
- the cost of raw materials
- advertising and marketing costs
- travel and accommodation costs for business trips (but not commuting costs)
- salaries and other staff costs
- office costs, like stationery and phone bills
- financial and legal costs, like accountancy fees and professional indemnity insurance premium
As we mentioned earlier, business entertainment costs are not usually tax deductible but 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 occasion (such as a Christmas party) that’s open to all your staff.
If you buy an asset for your business, things are a bit different. An asset is something that you buy that you’re going to keep and use in your business, such as a piece of machinery or a vehicle. 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, make sure they give you receipts so that you can reimburse them. You can then include these when you calculate your tax-deductible expenses.
Remember – normal commuting costs aren’t tax deductible but you can claim for other staff travel costs, for example, if an employee goes to a conference or visits a client.
We’re specialists in tax for limited companies
We’ve listed here just a handful of ways in which your limited company could (and should) be saving money and claiming tax relief. Here at Mad Hatters Accountants, we’re tax experts. We know our tax stuff. We’re perfectly placed to guide you through the maze of tax claims. All it takes to give you peace of mind is to pick up the phone. We’ll be delighted to hold a no-obligation conversation and talk you through the process.
Remember – we’re here to help