Understanding allowable expenses for your limited company

Managing your limited company expenses involves first understanding what qualifies as an allowable expense. Allowable expenses must be wholly and exclusively incurred for business purposes, as defined by the ‘wholly and exclusively’ criteria to claim tax relief.

Examples of allowable expenses include director’s salaries, property repair costs for the business part, and even relevant magazine subscriptions. But the key to successfully claiming these expenses lies in record-keeping.

Accurate record-keeping of all business expenses, inclusive of VAT receipts and initial company formation costs, will help validate your claims during any HMRC checks. However, tread with caution when it comes to expenses with a dual purpose – these cannot be wholly claimed and require precise allocation for the business portion.

Identifying legitimate business expenses

Clear criteria exist for identifying legitimate business expenses – the expense must be incurred wholly and exclusively for the company’s operations, not serving a dual purpose for personal use. This means that you can only claim the business portion of costs that have a mix of personal and business use.

Some specific allowable business expenses include:

• The cost of prescription glasses or contact lenses for screen-based work
• Uniforms or protective clothing necessary for work
• Vision tests if using visual display equipment regularly
• Reference books or magazines relevant to the business

So, the next time you purchase a new pair of glasses for your computer work or order a batch of industry-specific magazines, remember – these are legitimate business expenses.

Claiming tax-deductible business costs

Reducing your Corporation Tax bill can be accomplished by claiming tax-deductible business costs. Some examples of deductible business expenses include:

• Salaries
• Subcontractor costs
• Stock or raw materials for resale
• Mileage for business trips

Fuel costs

But did you know that you can also claim tax deductions for staff entertainment through the ‘Annual Event’ allowance, as long as the total cost per head does not exceed £150 and qualifies as an exemption?

VAT-registered limited companies can even reclaim VAT on public transport expenses, provided they are for business purposes and supported by proper VAT receipts.

Other claimable expenses include company formation costs, such as building a website and stationery expenses. However, do ensure that you maintain accurate records and documentation, especially for insurance expenses, to ensure they can be claimed as tax deductions. For more complex claim expenses, such as setting up a rental agreement to claim proportional costs, consulting an accountant like Sleek is highly recommended.

Avoiding non-allowable expenditures

• Awareness of non-allowable expenditures is crucial, even though many allowable business expenses can be claimed. This helps avoid surprises during tax season. Some examples of non-allowable business expenses include:
• Personal mobile phone costs
• Private medical insurance premiums
• Travel costs for ordinary commuting
• Personal legal fees
• Fines for breaking the law, including parking tickets
• Expenses incurred solely for entertainment purposes, such as client dinners or tickets to events

These expenses cannot be claimed as business expenses and cannot be reimbursed tax-free. It’s important to keep these in mind when managing your business finances.

So, before you book that flight for a business trip, ensure that the trip is 100% business-related to deduct the costs. Other non-allowable expenses include:

• Reimbursements for parking (as opposed to direct parking charges paid by the company)
• Residential broadband costs unless exclusively for business
• Gifts to clients if not non-cash, worth £50 or less, and not part of the contract
• Expenses such as mortgage interest and council tax are non-allowable for a limited company, despite being claimable by self-employed individuals using the apportionment method.

Lastly, remember that donations not made via Gift Aid and costs related to asset depreciation or improvements are not tax-deductible expenses.