In order to reduce your business profits, you can claim expenses. In order for an expense to be valid it must be both ‘reasonable’ and ‘wholly & exclusively for business’.
Reasonable: For an expense to be tax deductible it needs to be reasonable. Does the expense make business sense? A good thought experiment is to ask yourself “if you were employed, would your boss sign off on this expense”. For example, if I am a business consultant staying in London for business and I am paid £1,000 per day, it wouldn’t be reasonable to pay £800 for an overly luxurious hotel for the night.
Wholly & Exclusively for Business: you can only claim a tax deduction for expenses that are entirely for business purposes. If an expense is for both business and personal use, the personal element needs to be entered on a P11D and you need to pay additional business/personal tax on it. This is an admin burden, would cost more in accountancy fees and usually isn’t tax efficient so we would suggest not paying for anything that has both a business/personal purpose through the business.
Below is a list of expenses you can claim as a limited company. There are different rules for sole traders and partnerships which are listed here.
Direct costs
This relates to costs directly related to sales.
For example, if you were building a house, the direct costs would be the bricks, cement, windows, etc required.
Subcontractors
These are people you pay to complete a particular task - they aren't employees. If you pay someone to help you complete a particular section of work they would be classed as a subcontractor.
You will need to register for CIS if you pay subcontractors within the construction industry, click here for details.
Wages
Employee costs include: wages & employee benefits (e.g. medical insurance).
This includes the salary paid to company directors. It's usually tax efficient to pay a director/shareholder a small annual salary and top this up with dividends.
Pension
Company pension schemes are a great way of reducing your corporation tax liability.
Make sure that you take out a “net-pay” scheme paid directly out of your company bank account. Do not take out a “relief at source” scheme as this is less tax efficient.
Premises
If you have business premises then you may pay rent, business rates, gas, electricity, water and cleaning costs. All of these costs are allowable for tax purposes. If you rent a storage unit for stock or provide parking spaces to employees at or near your work then these are also business expenses.
If you are a small business you may be able to claim business rates relief - click here for more information.
Use of home
Directors and employees can claim the following:
Fixed amount: If a substantial amount of time is worked at home each person can claim a set amount (£6/week for the 2020/21 tax year) without the need to maintain receipts or bills. Simply put an expenses claim into the company, much like you would if you were employed by another company.
Broadband: If the person didn't have broadband in their home before working from home (which is very unlikely) they can claim 100% of the cost. If the person had broadband already, they can claim the difference between any upgrade (e.g. someone upgrades to fibre optic from £10/month to £30/month - they can claim the £20 difference). In reality, not many people claim for their home broadband unless they pay for two broadband connections into their home (e.g. one for personal use and one for business use).
HMRC guidance on this can be found here.
Insurance
We would suggest taking out either public liability and/or professional indemnity insurance to cover your business. If you have employees you are required by law to get employers' liability insurance although, you may not need employers' liability insurance if you only employ a family member or someone who is based abroad.
Public liability insurance protects against claims of personal injury or property damage that a third party suffers (or claims to have suffered) as a result of your business activities.
Professional indemnity insurance (also known as professional liability insurance) helps protect professional advice and service providing businesses from bearing the full cost of defending against a negligence claim made by a client.
Employers' liability insurance will help you pay compensation if an employee is injured or becomes ill because of the work they do for you.
Our governing body offers us a discount with Hiscox so we use them - if you have a governing body, it’s worth checking with them to see if there is a provider they recommend. We’d also suggest getting a quote from a comparison website such as Money Super Market, Confused.com or Compare The Market.
IT & software costs
Bookkeeping software: Quickbooks, Xero, FreeAgent, Sage One (click here for our bookkeeping software review).
Software: Microsoft office, business apps.
IT costs: Laptop, desktop, tablet, mouse, keyboard, USB memory stick.
Telephone
If you have a premises you can claim for the full cost of the office phone there.
You are also able to claim for mobile phone costs for you and your employees. If the mobile contract is in the company name you can claim the full cost but if the contract is in the individuals name you may only claim for the additional business call costs.
Postage, printing and stationery
Postage: Stamps, envelopes, sellotape
Printing: Printer, paper, ink
Stationery: Pens, pads, paper clips, highlighters
Advertising
Digital Ads: Social media, TV, radio, podcast sponsorships
Physical Ads: Direct mail leaflets, billboards, business cards, newspaper, magazine, vehicle wraps, posters
Merchandise: We would definitely suggest getting company “merch”. We have Millward May t-shirts and hoodies that we regularly wear. As long as the clothing is branded with your logo, you can claim it as a business expense. Other items include branded mugs, pens, notebooks, tote bags, hats, keychains, lanyards, water bottles & mouse pads.
Website
Domain name - our domain name is millwardmay.co.uk. There is usually an annual payment required to keep your website address.
Web hosting provider - provides the technologies and services needed for the website to be viewed on the internet.
Web designer - paying someone to build your website.
Travel & subsistence
Travel and subsistence can be claimed when travelling to a temporary workplace, click here to see if you are eligible.
Travel: Trains, buses, aeroplanes, taxis, var rentals.
Subsistence: You can claim a reasonable food expense when travelling by keeping receipts or you can use the benchmark rates set by HMRC that can be found here.
Personal vehicle
If you do business miles in a personal vehicle, you can claim mileage from the company to reimburse you for use of your vehicle.
You can claim 45p per mile for the first 10,000 miles and then 25p per mile after that (per tax year). For example, if I drove 12,000 miles during the tax year, I could claim 45p x 10,000 + 25p x 2,000 = £4,500 + £500 = £5,000
Company vehicle
It is generally not advisable to purchase a vehicle in the company’s name unless it is a van or an electric car. Learn more about the benefits of electric cars here.
If you do have a company vehicle, the associated costs are considered company expenses. However, you are required to complete an annual P11D form and pay additional company and personal taxes.
Given the complexities and frequent changes in this area, we recommend contacting us to discuss your specific circumstances.
Waste disposal
Removing, destroying or storing damaged, used or other unwanted products and/or substances.
Small tools & equipment
A carpenter could claim for a saw, chisel & tape measures for example.
Protective clothing
Safety boots, helmets, goggles, high visibility jackets, ear defenders or any other equipment designed to protect the wearer's body from injury.
Training, books & journals
Training - courses that enable you or your staff to provide a better service/product are claimable.
Books/journals - the publication must be business specific and not for self-interest. If you buy a work-related book just to broaden your background knowledge, you’re unlikely to be allowed to claim tax relief on the expense.
Annual parties
You can claim up to £150 per head per year on annual events such as a Christmas party and the employee doesn't need to pay personal tax on this - to qualify all expenses must meet the following conditions:
£150 (including VAT) or less per head - if you pay more than £150 per head, the whole cost is disallowed as a business expense!
annual, such as a Christmas party or summer barbecue
open to all your employees
Click here for more details.
Trivial benefits
An employer can provide trivial benefits such as a bunch of flowers, a box of chocolates, a meal out and the employee doesn't need to pay personal tax on this - to qualify all expenses must meet the following conditions:
it must cost no more than £50 to provide - if you pay more than £50 per gift, the whole cost is disallowed as a business expense!
it isn’t cash or a cash voucher
it isn’t a reward for their work/performance or in any way contractual
If you’re the director, you can’t receive trivial benefits worth more than £300 in a tax year.
Click here for more information on trivial benefits and here for a few examples.
Accountancy
You can claim for all fees that relate to producing the accounts and business advisory services. You aren't able to claim for fees that relate to your personal tax (e.g. your self-assessment)
Subscriptions
The company can cover the cost of any subscriptions to professional bodies recognised by HMRC, click here for a list of recognised bodies.
Charitable donations
It’s tax efficient to pay charitable donations through the company instead of paying them personally - you can’t claim gift aid if you pay to charity through the company and it can’t be claimed as a cost if you made a loss during the year - click here for more information. In order to claim them as an expense, you must be able to provide the following information:
Charity name/Membership name
Date of donation/membership subscription
Donation amount/membership amount
Gift aid claimed? This must be “No”
Important note: Crowdfunding donations do not count as charitable donations.
Entertaining
Client entertaining - you must be discussing a particular business project or forming/maintaining a business connection. It must be reasonable and can be for such things as food, drink, accommodation, theatre or sporting tickets. The business can pay for this entertainment, however it is not allowable for corporation tax purposes and VAT cannot be recovered. The best way I can describe an entertaining expense from a tax point of view is its like taking a dividend but not paying the personal tax on it, you do still have to pay the corporation tax.
Hospitality can only be treated as allowable for corporation tax if something of equivalent value is given in return ("quid pro quo").
Staff entertaining this is allowable for corporation tax purposes as long as it is wholly and exclusively for the purposes of trade. Unless it is covered by a particular exemption (see trivial benefits above), a personal tax charge could arise on the employees for any benefit they are getting from this.
Business gifts - treated in the same way as client entertaining, more information can be found here.
Bank charges, credit card costs & finance costs
You can't include costs for personal cards - the cards must be in the business name.
Bank charges - monthly fees, specific transaction fees (including foreign currency), exceeding overdraft fees, interest.
Credit card costs - monthly fees, late payment fees, foreign currency fees, interest.
Finance costs - loan interest & hire purchase fees/interest
Fixed assets
Fixtures & fittings, plant & machinery, motor vehicles and computer equipment.
Employee benefits
Periodic medical checks or health screening - only one a year is exempt from being taxed on the individual personally.
Eye tests - if they are required by health and safety legislation for employees who use a computer monitor or other screen.
Counselling - as an employer, you do not have any tax, national Insurance or reporting obligations if you provide welfare counselling services for your employees. The counselling service must be for welfare issues, such as bereavement, ill health or stress, problems at work, sexual abuse or personal relationship difficulties and must be available to all your employees. Click the link for more information: www.gov.uk/expenses-and-benefits-counselling
Research & development (R&D)
R&D reliefs support companies that work on innovative projects in science and technology. It can be claimed by companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
You may be able to claim Corporation Tax relief if your project meets HMRC’s definition of R&D - click here for more details.
Not claimable
Common expenses people incorrectly believe they can claim for:
Personal clothing that isn't protective or doesn’t have the company logo on it
Physiotherapy or chiropractor costs
Travel with a dual purpose (e.g. going abroad for a business meeting but then staying for a holiday)
Home broadband (see use of home section above)
Speeding fines/courses
Not usually claimable or worth claiming:
Designing, building and/or decorating a home office is not usually worth claiming (speak to us about this as there are tax implications to consider).
Glasses are not usually claimable as a business expense due to the likelihood of them being used personally. If however you have received a specific prescription that requires you to wear glasses for screen work, you can prove that you don't use them outside of work and you have a second pair of glasses that you use personally, then it is more likely that HMRC will allow the expense as a business one.