Understanding how business expenses work is the first step to ensuring your company is as tax efficient as possible. In this guide, we break down the difference between business costs, benefits and allowances and list some business expenses you might not know you can claim through your limited company.
Understanding business costs, benefits and allowances
If you have your own private limited company, you’re officially a corporation, even if you’re your only employee. This means that you file tax differently from when you were a sole trader. It also opens up more options for claiming tax back, but the ins and outs can be a headache if you’re not familiar with some common terms.
See also: How does a limited company work in the UK?
What is a business expense?
The corporation tax you pay is a percentage of your profits, not your income. What this means is that you only pay tax on the total after you’ve deducted acceptable expenses.
The key here is “acceptable”, because this only counts for activities “wholly and exclusively” related to your business in certain categories. Would buying a new computer count as a business expense? Not if you were also using it for gaming and your child’s schoolwork, for example. A certain percentage would be, but it would be difficult to prove that exact percentage to HMRC.
What is a capital allowance?
If you purchase an asset that is necessary for the function of your business, then you might be able to use your capital allowance to deduct the cost of this item from your profits, as with business expenses. These assets are often known as “plant and machinery”.
You can deduct up to a certain amount per year, known as the Annual Investment Allowance (AIA). It is currently £1,000,000, but it can change annually.
What is a benefit?
A benefit in kind is a perk provided by a company in lieu of salary. In the UK, the company may pay for the benefit, but the tax on the benefit is paid by the employee or, in your case, the director as if it was part of your salary or dividends.
For benefits in kind, you’ll have to pay personal tax on your annual Self Assessment rather than when you file your company tax.
When you are your business, it can be a thorny issue to determine when something is counted as a business expense, versus a benefit, versus a capital allowance and it’s best to get advice from an accountant if you’re unsure.
Claiming VAT back
You can only claim VAT (value added tax) back if your business is VAT-registered with HMRC. You only have to register to pay VAT if the total value of all of the goods and services you sell (that are not exempt from VAT) surpass £85,000 per year. (Note, this amount can change annually). You may register voluntarily before this point, but being VAT-registered comes with responsibilities, so you should talk it over with an accountant first.
If you are VAT-registered, you may claim back the VAT (usually 20%) on anything you buy through your business that is not exempt from VAT and is, once again, “wholly and exclusively” for use in your business.
It’s important to ensure that the goods and services you’re claiming back VAT for do actually have VAT added, rather than other duties and taxes. For example, almost all transport in the UK is zero-rated for VAT and insurance often includes a host of taxes, but not VAT. You can claim these as expenses (deducting them from your business’s profit), but you can’t claim back VAT on them and if you try to, HMRC might inspect your business and levy fines.
Tax deductible expenses for limited companies
What you can and can’t claim for is often complicated and it’s worth speaking to an accountant about your unique circumstances. However, here are a few common claims and how they work.
You can claim back rent for your business premises as a business expense. If you’re working from home, you may be able to claim the percentage of your rent that is your home office (or even your desk). Property insurance, security, business-related rates and utility bills are also allowable expenses.
2. Office equipment and supplies
Stationery, printing (including ink cartridges), postage and phone bills are all allowable expenses. Software expenses can also be claimed, but there are particular rules around when this is allowed.
3. Staff parties
Unlike some other countries, the UK does not generally count “entertainment” as an acceptable expense, so if you were looking forward to wining and dining clients on the company’s account, you can do so but you won’t be able to deduct the cost of those fancy lunches from your profits.
However, if you want to throw a party for your staff – even if that means just you – you can claim up to £150 as an expense per person, so long as the main purpose of the event is to entertain staff members and everyone in the company was invited.
See also: Common UK small business accounting mistakes expats should know about
You can claim for almost all business travel costs (including parking and hotel rooms). The main exceptions are fines (for example a speeding fine) and day-to-day travel between home and work.
You cannot claim for the ordinary clothing that you wear to work. The clothing expense category is only for clothes that are absolutely necessary for you to do your job such as protective clothing if you work in construction or costumes if you’re an entertainer.
6. Staff expenses
Salaries, bonuses, pensions, benefits, agency fees and employer’s National Insurance are all claimable expenses. You can also claim for training courses related to your business. Unfortunately, you cannot claim for carers or domestic help.
See also: Are you a UK contractor? Maximise tax efficiency by using your pension
7. Marketing and advertising
You can claim for advertising, including social media marketing like Facebook ads and even website costs. You can also claim for free samples. As mentioned previously, you cannot claim for entertaining clients, suppliers and customers or for event hospitality.
Unfortunately, you cannot claim back your gym membership, even if you consider your physique essential to attracting clients.
However, you can claim for software subscriptions and subscriptions to trade or professional journals and organisation memberships, so long as they’re related to your business.
9. Legal and financial costs
You cannot claim back any fines for breaking the law. You also cannot claim for the legal costs of buying property or machinery (that would fall under capital allowance).
You can claim for solicitors, surveyors and architects you require to perform your business and for professional indemnity insurance premiums.If you hire an accountant to help you get the most out of your business expenses, you can claim tax back on their fees as a business expense too.
Our contractor accountants offer specialist, personalised accounting and tax services with a flexible fee structure to help businesses of any size. Get in touch with us at email@example.com or +44 (0) 20 7759 7553.
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