Nobody wants to pay more tax than necessary. However, you could miss out on valuable tax savings if you’re a limited company director with many unclaimed expenditures. To ensure that your business is on track for success, you must first understand which expenses are tax deductible.
From business insurance to Christmas parties, you spend many expenses when starting and running your business, and you might want assistance in reducing your company tax burden at the end of the year. Running a limited company has multiple financial challenges, but understanding the types of expenses that can be claimed back is essential to maximising earnings.
Limited companies can claim back basic business costs such as rent, salary, travel, office supplies, marketing, and professional fees, which reduces their tax burden and increases earnings. Remember that only expenses incurred entirely and exclusively for business activities are acceptable.
Claiming genuine costs can dramatically reduce your tax burden, freeing up precious resources for reinvestment and growth. But navigating the world of allowable expenses can feel like dealing with tough challenges.
Our limited company accounting specialists have put together this comprehensive article that explains all you need to know about claiming costs as a limited corporation. Get in touch with our accounting team today.
What are allowable business expenses?
Allowable limited company expenses are genuine charges that firms can deduct from their taxable revenue, reducing their tax liability.
Allowable business expenses are necessary expenses that are not taxed. These expenses are considered essential and are used only for business objectives. Knowing which business costs are acceptable is critical for complying with HMRC laws and taking full advantage of potential tax breaks.
Allowable expenses are business expenses that can be deducted from your income to lower the amount of Corporation Tax you owe.
For example, if your revenue is £40,000 and your permitted expenses are £5,000, you will only pay tax on £35,000.
For an expense to be eligible for tax relief, it must be on HMRC’s approved list and an expense incurred wholly and exclusively in your business’s day-to-day running.
This implies you won’t be able to claim any personal costs. However, you may incur expenses that are used for both personal and commercial purposes. In that case, you can only claim for business expenses.
For example, if you had a four-day business trip and extended it by three days for leisure, you can only claim the four business days on your tax return.
Any approved expense claim must be supported by documentation such as invoices, receipts, and purchase orders. This means that keeping correct spending records is critical, so we’ll review the best ways to retain them later in this article.
How do I claim back expenses from a limited company?
Claiming expenditures requires precise record-keeping. Remember that thorough documentation is critical, as HMRC may request evidence to corroborate your claims.
Here’s a step-by-step instruction:
- Keep detailed records of all business transactions and costs. This includes receipts, invoices, and any other pertinent documentation.
- Identify each expense as a corporate or personal cost. Only business expenses are eligible for reimbursement.
- Generate regular expense reports documenting each transaction, including its purpose and amount spent. This organised documentation will make the claims procedure easier.
- Depending on your company structure, you can submit expense claims to HMRC through your yearly self-assessment tax return or your firm’s annual financial statements. Maintain accuracy and honesty in your submissions.
Can all expenses be classified as tax-deductible expenses?
While many expenses can be recovered, not all business calls are tax deductible. The most important factor is the purpose of the spending; it must be incurred only for business purposes. Personal or non-business-related expenses are typically not eligible for tax relief.
Expenses incurred before your company began trading are also often not allowed. Some pre-trading business expenses paid for, such as market research or firm startup fees, may be eligible. Always consult HMRC or a tax advisor for clarification on specific costs.
Benefits of Using Limited Company Expenses
Using allowable corporate expenses provides various advantages to firms. Here are several significant advantages:
Tax Deductions: By claiming permissible business expenses, a limited company can reduce its taxable profit and thereby lessen its tax liability. This can help the company maximise retained earnings while freeing up capital for corporate expansion and investment.
Business Efficiency: Managing and claiming expenses correctly can boost overall business efficiency. It enables you to analyse and control expenditures, uncover possible savings opportunities, and make informed financial decisions based on precise spending data.
Professional Image: Claiming appropriate business expenses can help you present a professional image to clients, customers, and stakeholders. It displays that the organisation acts responsibly and transparently, which can increase confidence and credibility.
Compliance with Tax Regulations: A limited firm assures tax compliance by appropriately identifying and claiming permitted expenses. This helps you prevent penalties, fines, and potential audits by tax authorities.
Financial planning and forecasting: Tracking and analysing expenses yield useful financial information for budgeting, forecasting, and business planning. It enables you to evaluate profitability and cash flow and make sound decisions to drive the company’s growth.
What you can claim as limited company expenses
Allowable Expenses that can be Claimed Back
These costs are classified into several categories; some of the most common allowable expenses are:
- Office expenses, including rent, business rates, utilities, stationery, equipment, and insurance for your premises, would be considered allowable.
- Staff expenditures, including salaries, wages, national insurance contributions, and pension contributions for your employees.
- Travel and subsistence expenses include mileage, public transportation fees, parking costs, lodging, and meals (within restrictions) incurred during business visits.
- Phone bills, internet, mail, printing, bank charges, and accounting fees are all part of the operating costs.
- Professional fees include legal, consulting, and audit fees.
- Pre-trading costs include allowable expenses such as market research, business plan preparation, and legal setup fees.
- If you have a pension contract, you can claim 100% tax relief on contributions as an allowed expense up to a certain maximum. The yearly allowance for the 2020/2021 tax year is £40,000. Because pension schemes are complex, it is recommended that you consult with an independent financial counsellor before making any contributions.
- General repairs and maintenance of your equipment and business premises are allowable expenses. Other expenses, such as water heating systems and building components, cannot be specified as permitted expenses, but they can be claimed as capital allowances through your annual investment allowance.
- You can claim expenses for legal and financial services used for your business, such as accountants, solicitors, surveyors, and architects, as long as they are strictly business-related.
- Any class or training course you take to improve your skills and knowledge for your business falls under personal development, and the entire cost can be claimed as an allowed expense.
- Subscriptions to professional groups, trade periodicals, or journals that aid your business may be claimed if they are directly related to your industry and activity.
What you cannot claim as limited company expenses
Non-allowable limited company expenses are ineligible for tax deduction or cannot be claimed as valid business expenses. Here are some common instances.
Personal expenses: Any expenses that are solely personal in nature, such as personal apparel, travel costs, or entertainment, cannot be deducted as company expenses.
Fines and penalties: Fines, penalties, and legal fees paid due to violating the law or rules are typically not allowed expenses.
Capital expenses: Costs connected with purchasing or improving fixed assets, such as property or equipment, are often classified as capital expenses and are not fully deductible in the year of purchase. Instead, they are frequently claimed as capital allowances over time.
Dividends: Dividends paid to shareholders are not considered permissible expenses. Dividends are paid from profits after taxes and are subject to dividend tax rather than being deducted as a cost. To learn more about drawing out dividends, check out our blog.
Private Healthcare and Insurance Premiums: – Personal use of health insurance and private medical expenses are typically not allowed as corporate expenses.
Entertaining clients: Expenses incurred solely for entertainment purposes, not business entertainment, such as extravagant client meals or athletic event tickets, are typically not acceptable as business expenses.
Claiming authorised expenses enhances your company’s short- and long-term futures. In the short run, you will minimise your Corporation Tax liability and save money. In the long run, you can factor these savings into your cash flow projections and spend money expanding your business.
To take advantage of the allowed expenses discussed in this guide, remember:
- Expenses must be used only for business objectives.
- You must keep precise spending records to back up your claims if HMRC questions them.
Understanding what may and cannot be claimed back allows you to guarantee that your company maximises possible tax breaks. Regularly examine and update your cost policies, stay up to speed on HMRC requirements, and consider seeking professional guidance from an accountant like Cloudco Group to improve your company’s financial health.
With smart administration, your limited company can prosper while reducing tax liabilities. Contact us today for further guidance and advice.