What expenses can I claim as a Ltd Company?
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Limited Company expenses
The rules for deciding what business expenses can be deducted from your profit for tax purposes can be quite complex. The importance of claiming all your allowable business expense deductions cannot be overstated.
When a limited company claims allowable expenses, they will reduce their profit which in turn reduces Corporation Tax liability and payments. Expenses which have a personal and business element are not generally allowable. Entertainment expenses cannot usually be used to reduce Corporation Tax, but they are usually a legitimate business expense.
We have listed below some important categories of business expenses:
Business travel and subsistence
For a limited company, the general rule is that expenses must be “wholly, exclusively and necessary” incurred in the performance of the duties of the employment.
The business can claim tax relief on accommodation and other travel expenses used when directors and employees are travelling for business related purposes. This also includes subsistence whilst travelling including meals and any other necessary costs of travelling, for example parking charges, tolls, congestion charges or business phone calls.
Business entertainment is defined by HMRC as any form of free or subsidised entertainment or hospitality. Under the tax rules, no tax relief is usually available to claim expenses incurred in relation to business entertainment.
Business entertainment expenses include:
- food and drink
- accommodation (e.g. hotels)
- theatre and concert tickets
- sporting events and facilities
- entry to clubs and nightclubs
- use of capital assets such as yachts and aircraft
- payments made to third party business entertainment organisers
- free samples
- business gifts
- the provision of entertainment or hospitality solely for the directors or partners of a business.
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Expenses covered by an exemption
Some business expenses and benefits are covered by exemptions (which have replaced dispensations). This means you do not have to include benefits like business travel, phone bills, business entertainment expenses, uniform and tools for work in your end-of-year reports.
To qualify for an exemption, you must either be paying a flat rate to your employees as part of their earnings – this must be either a benchmark rate or a special rate approved by HMRC or paying back the employee’s actual costs.
If you do not have an exemption, you must report the cost on form P11D. You do not need to submit a P11D form for an employee if you are paying tax on all their benefits through your payroll, known as payrolling.
VAT on business expenses
There are special VAT rules which determine the VAT recoverability on many regular expenses incurred by businesses which we consider below. The VAT rules normally prevent businesses reclaiming VAT on supplies that are not made directly to the business. However, there are certain circumstances when the VAT rules are relaxed for expenses incurred by employees for business purposes.
Reimbursing expenses for home office equipment
The guidance for reimbursing expenses for employers who have employees working from home due to the COVID-19 outbreak has been updated. This could be a result of the workplace being closed or because employees are following government advice to self-isolate.
The updated guidance reflects temporary changes to the rules for reimbursing employees for the purchase of office equipment whilst working from home. This temporary measure means that employer reimbursements for the cost of home-office equipment expenses will be exempt from tax and NICs.
The expenditure must meet the following two conditions to be eligible for relief:
- That equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak, and
- The provision of the equipment would have been exempt from Income Tax if it had been provided directly to the employee by or on behalf of the employer (under section 316 of ITEPA).
The exemption is a temporary measure currently scheduled to end on 5 April 2021.
The rules are different for capital expenditure by limited companies. The tax rules do not usually allow you to automatically deduct the full cost of capital items such as computer equipment, vehicles and machinery in one go. The deductions are made using capital allowances.
Different rules apply depending on the type and cost of capital expenditure. For example, the Annual Investment Allowance (AIA) is a generous tax relief that allows for the total amount of qualifying expenditure on plant and machinery to be deducted from profits before tax. The AIA was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. This limit has been temporarily increased to £1 million until 1 January 2022.
For Plant & Machinery expenditure that exceeds the AIA and does not qualify for a First Year Allowance, a standard 18% Writing Down Allowance (WDA) is available. There is a lower WDA of 6% for certain capital expenditure.
All companies and organisations subject to Corporation Tax must keep proper business records. This includes keeping accurate records of all expenses. For example, in order to claim business mileage, the full details of all journeys and the mileage covered must be held. For tax purposes, the records must be held for at least 6 years from the end of the relevant accounting period.