Maximising allowable expenses for limited companies

Spending money on tax deductible expenses, lowers your company’s profits for tax purposes and therefore corporation tax liability.  

In this comprehensive guide, we will explore the categories of allowable expenses, provide insights on HM Revenue and Customs (HMRC) rules and compliance, and share strategies for maximising your deductible expenses. 

What are tax deductible expenses for limited companies? 

There is usually a difference between accounting profit and profits for corporation tax. This can be as a result of disallowable expenses. 

Expenses solely for business use can be included in the accounts and tax return of limited companies. Where expenses include a personal element, an adjustment must be made on the tax return, reducing allowable expenses. Furthermore, some expenses can’t be claimed at all on your company tax return. For example, capital costs such as the purchase of assets and legal costs in connection with capital costs. 

Allowable expenses must be wholly and exclusively incurred for business purposes.

Expenses can be paid through the company bank account, and costs paid personally can also be reimbursed by the company and included on the tax return where wholly and exclusively for the running of your business. 

For specific categories on what expenses your business can claim, see below. 

The importance of record keeping 

Maintaining accurate and comprehensive records of your expenses is crucial for claiming allowable expenses and ensuring compliance with HMRC regulations. You must retain your records as evidence for six years after the end of the accounting period. 

Implementing a robust record-keeping system is essential to keep your records organised and accessible. This could be a manual system or you can store records digitally in a safe, secure place. If you are uploading documents into your bookkeeping software, or storing them digitally, then you don’t need to keep the records elsewhere. You can dispose of the paperwork. 

It is important to have the evidence to demonstrate your records are correct and accurate, especially when it comes to whether payments are allowable expenses for your company. Should HMRC launch an investigation into your business, or a tax period having all the information to hand can help the investigation run smoothly. 

Strategies for maximising deductible expenses 

To maximise tax deductible expenses for your company, consider implementing the following strategies: 

• Plan your expenses carefully and ensure that they are wholly and exclusively for business purposes so that they are tax deductible. Preparing a budget at the start of the financial year helps you plan and monitor business expenses to ensure your financial results meet expectations. 
• Keep detailed records and store all relevant documentation as evidence for your records, should you need to look back on anything or provide additional information to a third party, such as HMRC. 
• Consult with an accountant to ensure that you are claiming all eligible expenses and complying with HMRC rules. 

What are allowable expenses for limited companies? 

Allowable expenses must be wholly and exclusively for the running of the business. This list is not exhaustive and should you have a specific query speak to your accountant who can advise you further.  

Products for resale/raw materials stock 

The purchase of stock for resale, or to use in the manufacture and sale of products is an allowable business deduction. 

Office costs 

Costs of running an office, including rent and rates, utility costs, cleaning and repair costs can all be deducted from your company profits. You may be able to claim a deduction for use of home as office if this is relevant to your business. Telephone and internet bills for your business are also tax deductible where they are solely for business. If you mobile phone is used for both business and personal, you will need to make an adjusted on the company tax return to remove the personal element of the cost. 

Employee wages, including directors’ wages and benefits 

Employee wages and salaries are deductible, as are PAYE and NIC liabilities due to HMRC. The cost to the employer of providing benefits to employees, such as company cars, and employer pension contributions are also deductible for tax purposes. 

Training 

Training courses that are business related and updates or provides expertise or knowledge in the existing business area are tax-deductible. Where courses develop new skills or retraining they are not tax-deductible expenses. It can be hard to distinguish so please seek expert guidance from your accountant. 

Staff gifts and staff entertaining 

Gifts to employees costing up to £50 are known as trivial benefits and are tax deductible without the need to report them. For staff entertaining, up to £150 per head at an annual event is allowable. 

Insurance 

Insurance is crucial for businesses, and there insurance companies offering cover to various types of work. Many of these policies are tax deductible, including employers’ liability, public liability and professional indemnity insurance. 

Professional subscriptions, including those for employees 

If you must pay the professional membership fees to be able to do your job, or to be a member of a body or society is relevant to your job. If the professional organisation is not approved by HMRC, deduction for tax purposes is not allowed. 

Legal and professional fees 

Using an accountant or solicitor for finance and legal advice for your business are usually allowable expenses when incurred wholly and exclusively for the running of the company. However, any cost incurred in connection with a capital asset (i.e. solicitor’s fees on the purchase of freehold land and buildings), those incurred on the renewal of a long-term lease or with the capital structure of the business are not tax deductible. 

Any costs incurred for you personally, for example the cost of your personal tax return, is not allowed on the company tax return. 

Bank charges and interest 

Bank charges and interest, including loan interest, credit card fees, transactions fees etc are all deductible for tax where they are wholly and exclusively for the running of the business. 

Administration expenses 

Other admin costs, including postage and stationery and office supplies are allowable where used in the trade of the business. 

Advertising and marketing 

Advertising your products, building a website, marketing your brand and public image are essential in a successful business. These costs are allowable for tax deduction.  

Travel expenses 

Travel for business trip, including mileage, public transport, taxis and flights can all be allowable expenses for companies. It’s important to consider whether there is any personal element to these trips, for example did you pay more for a bigger room as someone stayed with you or did you stay longer to turn it into a break? 

Costs for commuting from your home to office is not a tax-deductible expense. 

Pre-trading expenses 

Costs spent for the purpose of the business before you started your company may qualify as pre-trading expenses. These include costs that would have been allowable had the business been trading. These costs must have been incurred up to seven years before your business began. 

What are disallowable expenses for limited companies? 

Client entertainment and gifts 

Business entertaining costs for customers are not tax deductible so they’d need to be adjusted on your company tax return. 

Capital expenditure 

Capital expenditure can include the purchase of assets, for example computer and office equipment is not a tax-deductible expense. Instead, capital allowance may be able to be claimed which provide limited companies with relief for the cost of capital expenses. 

Dividends paid 

The payment of dividends to shareholders are not a tax-deductible expense, as it is a payment to distribute profits. 

Fines, including parking tickets 

Fines and penalties are not allowable as HMRC deems the cost not to be incurred wholly and exclusively for the purposes of the company’s trade. 

Charitable donations 

Donations to charity are not wholly and exclusively for the purposes of the company’s trade and are therefore not deductible from a company’s trading income. It can however be possible to claim tax relief for the donation against total profits as long as the donation meets various criteria including:

• the donation is a sum of money
• the donation is not subject to conditions relating to repayment and
• there are no benefits associated with the donation. 

How to ensure you don’t miss allowable expenses 

Reducing your corporation tax bill can be accomplished by claiming tax-deductible business costs. Using an experienced accountant will help you to get the best advice and they’ll take a detailed look at your accounts and when preparing your tax return ensure your company claims all that they can. 

How TaxAssist Accountants can help 

By understanding and effectively managing your allowable expenses, you may be able to reduce your limited company's tax liability and optimise its financial health. 

For personalised advice and guidance on allowable expenses for your limited company, contact your local TaxAssist Accountant on 01233 771926 or use our online contact form. 

Last updated: 20th June 2024