Complete Guide to Limited Company Expenses

As a Limited Company director, you will incur a wide range of expenses while running your business. Some of these costs are tax-deductible and can be offset against your company’s Corporation Tax bill. Some are allowed (with restrictions), and others are not allowed at all.

In this guide, we explain which costs your company can legitimately claim.

Company Expenses – A quick overview

• A company expense is only tax-deductible if it has been incurred wholly and exclusively for the purposes of your business.
• Legitimate expenses can reduce your company’s profits and its Corporation Tax bill liability.
• A record of any purchase must be kept in either digital or paper format.
• Expenses can either be paid directly from the company bank account or reimbursed where a director or employee incurs a legitimate business cost personally.
• Costs that are not allowable must be added back when calculating taxable profits.
• Some expenses give rise to a benefit in kind, which carries separate tax and reporting obligations.

How are company expenses offset against a Limited Company?

Think of company expenses in three distinct categories. While they all involve company money leaving your bank account, HMRC treats them differently when it comes to your tax bill.

1. Revenue expenses

These are your ‘allowable expenses’, the regular costs of running your business for example software subscriptions, insurance, or office stationery.

How it works: These costs are deducted directly from your total turnover. What is left is your taxable profit. The more allowable expenses you have, the lower your profit, and the less Corporation Tax you pay.

2. Capital expenditure and capital allowances

Some business spending does not qualify as a revenue expense.

Items that provide lasting value, such as machinery, vehicles and substantial equipment, are treated as capital expenditure. This is because HMRC views these as ‘assets’ rather than daily costs.

How it works: These costs are not deducted directly from profits. Instead, tax relief is given through capital allowances over a period of time.

Under the Annual Investment Allowance (AIA), you can deduct the full value of most plant and machinery (up to £1m) in the first year, which is a massive help for cash flow.

3. Benefits in kind

If a company pays for something that provides a personal benefit to a director or employee, it may create a benefit-in-kind.

Common examples include company cars available for personal use, gym membership and private medical insurance – in the eyes of HMRC these are classed as a ‘perk’ of the job.

How it works: Benefits in kind must be reported to HMRC, usually via form P11D, with associated Employers’ National Insurance reported on form P11D(b). This form is used to report on National Insurance the company owes on those perks. The company may also have to pay National Insurance on the value of that ‘perk’.

Some small benefits may qualify as ‘trivial benefits’, provided each benefit does not exceed £50 (directors are subject to an annual cap of £300).

The cost of annual staff events (such as a Christmas party) is exempt from tax provided the total cost per attendee does not exceed £150, including VAT.

Legitimate Limited Company Expenses

We have broken down the most common Limited Company expenses below. This is not an exhaustive list, so we recommend seeking professional advice if you are unsure about a specific claim.

• Working from home >
• Phones, broadband and telephony >
• Equipment, tools and software >
• Office, premises and working environment costs >
• Travel and accommodation >
• Professional fees and advisers >
• Marketing, advertising and online costs >
• Insurance and financial charges >
• Salaries, wages and employer costs >

Working from home

If you work from home, the company can claim a proportion of household running costs where there is clear business use.

This may include heating, electricity and broadband. Again, you must allocate any costs on a reasonable basis and be able to justify any claims you make.

Many smaller limited companies use the fixed £6 per week HMRC flat-rate allowance (£312 per year), which suits most contractor businesses.

You need to take extra care if you want to claim a proportion of household costs or create a more formal arrangement, such as charging your company rent under a contractual arrangement.

Phones, broadband and telephony

Telephone and broadband costs can be claimed when incurred for business purposes.

The tax treatment of mobile phones is fairly straightforward. A limited company can provide a director or employee with one mobile phone without creating a benefit-in-kind, provided the contract is in the company’s name.

Where the contract is held personally, only the cost of individual business calls can be reimbursed. Line rental and bundled charges are not allowable in this case.

Broadband expense rules are more restrictive. If the broadband contract is in the company’s name and used for business, the cost is usually allowable.

Where a home broadband contract is held personally, HMRC treats the cost as having a dual purpose. In most cases, this makes it difficult to claim any proportion of the cost.

Internet-based phone systems, VoIP services, and business telephony subscriptions are generally allowable when used solely for business and paid for by the company.

Equipment, tools and software

Most day-to-day equipment used in the business is allowable. This includes:

• Monitors
• Office furniture
• Printers
• Trade-specific tools
• Business software and subscriptions are also allowable where they relate directly to company activity.

Items that provide longer-term value, such as computers or laptops, are treated as capital expenditure rather than day-to-day expenses. The cost of these larger items is not deducted in full; these costs qualify for tax relief through capital allowances over time (see above).

Office, premises and working environment costs

If your limited company rents office space, the rent and associated running costs are allowable. Some typical costs include utilities, business rates, business insurance, and maintenance (e.g. service fees).

If premises are shared or partly used for non-business purposes, you must apportion on a reasonable basis. If you’re unsure what constitutes reasonable, get in touch with your accountant.

It’s worth noting that rental deposits are not treated as ‘expenses’ on your accounts; they remain the company’s assets until they are returned.

Travel and accommodation

Business travel costs are allowable where journeys are undertaken wholly for business purposes.

Typical costs include public transport, taxis and flights, plus accommodation if you need to stay overnight for business.

If you use your own vehicle for business travel, the simplest method to reimburse directors is to apply HMRC’s approved mileage rates, currently 45p/mile for the first 10,000 miles in the tax year, and 25p/mile thereafter for cars.

Travel to a permanent workplace is treated as ordinary commuting and is not allowable.

Under the 24-month rule, you can no longer claim for travel and subsistence once an employee attends (or knows they will be expected to attend) the same site for 24 months or more.

Subsistence costs (such as food and drink) are only allowable when incurred during qualifying business travel.

Relocation expenses may be claimed up to a lifetime limit of £8,000 per employee, subject to qualifying conditions.

Professional fees and advisers

Your company can also claim any professional fees it incurs.

For smaller companies, this typically includes accounting fees and legal advice. You may also use bookkeeping, tax and other professional services.

Importantly, you can’t claim professional fees which cover personal matters, including a director’s personal tax return, although this may be included (for free) as part of your monthly accounting fee.

Training costs are allowable where they relate to maintaining or improving existing skills required for the business. Training that creates a new trade or skillset is not normally allowable.

Marketing, advertising and online costs

Costs incurred to promote the business and generate income are generally allowable.

This includes website design and hosting, branding, online advertising, search engine marketing, social media promotion and exhibition fees.

Marketing costs are normally treated as revenue expenses when incurred for genuine business reasons.

Insurance and financial charges

Business insurance is another regular and legitimate company cost.

Most contractors have professional indemnity, public liability, and employers’ liability insurance as standard. You may also take out relevant life cover, equipment cover, officers’ insurance and cyber cover.

Business bank charges, card processing fees and interest on business loans or overdrafts are also allowable.

Importantly, any fines and penalties you incur are not tax-deductible.

Salaries, wages and employer costs

The cost of paying directors and employees is allowable, provided salaries are processed via your limited company payroll.

Employers’ National Insurance Contributions are also deductible, as are employer pension contributions to approved schemes.

Bonuses and commissions are allowable where they represent genuine remuneration for work carried out and are commercially justifiable.

Pre-trading expenses

Costs incurred before your company started trading can usually be claimed once it begins trading.

These costs must relate directly to setting up the business and are treated as if incurred on the first day of trading.

For Corporation Tax purposes, legitimate pre-trading expenses can generally be claimed if incurred within the seven years before incorporation.

If the company is VAT registered, VAT on pre-trading costs may also be reclaimed. This is normally limited to four years for goods still held at the time of registration and six months for services.

Common examples include professional fees and early website development.

Expenses you cannot claim

Some costs are specifically disallowed for Corporation Tax purposes.

These include:

• Personal expenses with no business use.
• Dividends paid to shareholders.
• Fines and penalties.
• Most client entertainment costs.

Client entertainment may still be reimbursed by the company, but it cannot be offset against the company’s Corporation Tax bill.

Expenses that fail the wholly and exclusively test must be added back when calculating taxable profits.

Record keeping

You must keep records to support all expense claims.

This includes invoices, receipts and evidence showing the business purpose of each cost.

Our Integro Accounting clients benefit from using our recommended software program FreeAgent – this will allow all clients to scan in their receipts and keep copies digitally. If you use accounting software such as FreeAgent or Xero, you can upload everything to your online account.

All companies must retain accounting records for at least six years.

How IR35 affects expense claims

If your contract work falls within the scope of the IR35 rules, your ability to claim expenses through a limited company is restricted.

In many cases, allowable expenses are limited to those available to employees, and relief for travel and subsistence is significantly reduced.

If your work is affected by IR35, it is worth confirming your position with your accountant before claiming expenses – you can also read more about IR35 here in our Comprehensive Guide to IR35.

Do you have any expense-related questions?

If you have any questions about expenses or are unsure whether you can claim, please get in touch with us. We’re always happy to help.

Get in touch today by calling 0207 096 2659 or book a free discovery call with our expert accountants who can guide you further.