Most limited companies incur insurance and financial costs as part of their day-to-day business.
For a contractor, this might mean professional indemnity insurance, monthly bank charges, card processing fees or interest on a business overdraft.
These costs are usually allowable for Corporation Tax purposes where they relate wholly and exclusively to the business.
However, there are a few exceptions – most importantly, fines and penalties.
In this guide, we look at the main insurance and financial costs you’re likely to encounter while running your company.
Business insurance
Your company can normally claim the cost of insurance which protects the business.
Typical policies include:
- Professional indemnity insurance.
- Public liability insurance.
- Employers’ liability insurance.
- Business equipment cover.
- Cyber insurance.
- Directors’ and officers’ insurance.
The main thing is that the policy relates to the company and its business activities.
If you pay for a personal insurance policy through the company, that does not make it tax-deductible.
Professional indemnity insurance
Professional indemnity insurance is a common policy type for many of our clients, particularly contractors and consultants.
It protects your company if a client claims that your work, advice or services caused them a financial loss.
Some agencies and clients will also insist that you have a minimum level of cover before they will engage you.
Where the policy relates to your company’s trade, the premiums will normally be allowable.
HMRC specifically includes professional indemnity insurance among the legal and financial costs a business can claim.
You can read HMRC’s guidance on legal and financial expenses.
Public liability insurance
This type of cover protects your company if customers, suppliers or members of the public are injured or suffer property damage as a result of your business activities.
It is not compulsory for every limited company, but – as with PI cover – some clients may require you to have it as a condition of the contract.
Where the policy has been taken out for the company, the premiums will normally be an allowable expense.
Employers’ liability insurance
By law, most businesses with employees must have employers’ liability insurance. This protects the business if an employee becomes ill or is injured because of the work they do for the company.
Importantly, there are some exceptions – a company with a sole employee may be exempt where that employee also owns at least 50% of the company’s issued share capital.
That exemption is particularly relevant to small owner-managed companies, where the sole employee is also the controlling shareholder.
You can read the Health and Safety Executive rules here.
Cyber and equipment insurance
If you’re a technical contractor, you can also take out cover for your equipment (e.g. laptops, specialist tools), especially if you regularly take it to client sites.
In recent years, cyber cover has also become increasingly popular, especially for businesses which hold customer data or depend heavily on their IT systems.
Policies vary, but they may cover the cost of dealing with a data breach, cyber attack, ransomware incident or a period when your systems are unavailable.
If the cover has been taken out to protect the company and its business assets, the premiums will usually be allowable.
Relevant life insurance
Relevant life insurance is treated differently from standard ‘business’ insurance policies.
It is a type of life policy an employer takes out for an employee or director and, if it meets HMRC’s relevant life policy rules, the premiums are usually tax-deductible for the company, with no benefit-in-kind implications for the employee.
For full details, read HMRC’s information on relevant life policies.
Business bank charges
The costs of running your business bank account – regular and one-off charges – will normally be allowable.
These might include:
- Monthly account fees.
- Transaction charges.
- CHAPS fees.
- International payment charges.
- Business credit card fees.
- Overdraft charges.
If the charge relates to the company’s normal banking activity, it is normally tax-deductible.
Card processing fees
If your company takes card or online payments, the funds that arrive in your bank account will often be slightly less than the amount the customer actually paid, as payment processing companies (e.g. Stripe, PayPal) usually deduct a fee before passing the balance on to you.
These fees are a normal business cost and are usually tax-deductible.
Keep the statements or invoices from the payment provider with your other company records, as they’ll show exactly what was extracted in fees.
Interest on business loans and overdrafts
If your company borrows money for the business, the interest it pays will usually qualify for tax relief.
That could include interest on:
- A business loan.
- A company overdraft.
- Asset finance.
- Other commercial borrowing.
The important part is what the borrowing was used for.
Money borrowed to fund working capital, buy equipment or meet other company costs is clearly business-related, so the associated interest will normally be taken into account for Corporation Tax.
Loan repayments are not an expense
There is an important difference between repaying a loan and paying the interest charged on it.
If your company borrows £20,000. When it eventually repays that £20,000, the repayment is not a £20,000 business expense – it is simply paying back the money it borrowed.
The lender’s interest, together with any qualifying finance costs, is dealt with separately in your company accounts.
What if you lend money to your own company?
Directors quite often put their own money into a company, particularly during the early stages of the business or when cash flow is tight.
If you lend the company £10,000, it can repay you later. The repayment is not treated as a business expense because the company is simply returning money it owes you.
Again, interest is treated differently in the company accounts.
If your company pays you interest on the loan, there are extra tax and reporting requirements for both the company and the director, so make sure your accountant is aware of the arrangement and can advise you accordingly.
HMRC interest and penalties aren’t the same thing
If your company settles its tax liabilities late, HMRC may charge interest, a penalty, or sometimes both.
For tax purposes, those two charges are treated differently.
Late payment interest on Corporation Tax can fall within the Corporation Tax loan relationship rules and may therefore be deductible.
A penalty is treated differently, and in most cases, you can’t deduct it for Corporation Tax.
If you’re unfortunate enough to be charged interest and issued with a penalty, make sure you account for them separately in your accounts!
Fines and penalties
Fines and penalties are generally not allowable business expenses for tax purposes.
This might include:
- HMRC penalties.
- Companies House late filing penalties.
- Regulatory fines.
- Parking fines.
- Other penalties imposed for breaking the law.
Read HMRC’s official guidance on fines, penalties and damages.
Parking charges and parking fines
Paying to park on a business journey is one thing; receiving a parking penalty is another.
If you spend £15 parking while visiting a client, that cost can normally be included with your other qualifying travel expenses.
But if you overstay, park illegally or otherwise breach the parking rules, any fine or penalty is normally disallowed for tax purposes – even if the company pays it.
So the parking fee may be allowable; the penalty for getting it wrong usually isn’t.
Companies House late filing penalties
Companies House automatically charges a penalty if you file your company’s annual accounts late.
Although this cost clearly relates to the company, this does not mean it’s tax-deductible.
You cannot normally offset the penalty from your profits when working out the Corporation Tax liability at the end of the year.
The same rules apply to most other statutory fines and penalties.
Aside from the annoyance penalties can create, not incurring them in the first place is key – and using accounting software and hiring a good accountant are sensible ways of minimising the risk of filing late.
What about VAT on insurance?
Insurance is treated a little differently from most other standard business costs because the premium will usually have no VAT on it in the first place.
Most policies charge Insurance Premium Tax (IPT), which is added to your premium.
It is completely separate from VAT, and can’t be reclaimed on your VAT return.
VAT on bank and finance charges
There isn’t a uniform VAT rule for bank and finance charges, as the tax treatment depends on the type of charge.
Interest and many normal banking services are exempt, so there is no VAT to recover.
Other fees – particularly some merchant, payment processing or finance charges – may have VAT added.
If they do, and the cost relates to the company’s taxable business activities, a VAT-registered company can usually reclaim it in the normal way.
Keep records of insurance and finance costs
Keep invoices, policy documents and statements for insurance and financial expenses paid by the company.
For example:
- Insurance policy schedules and renewal notices.
- Bank statements.
- Loan agreements.
- Interest statements.
- Card processing statements.
- Finance agreements.
For anything slightly ‘unusual’, it is also worth noting what the company paid for and why.
This can save a lot of head-scratching later if the reason for the purchase isn’t obvious from the bank statement alone.
Which insurance and financial costs can’t your company claim?
Be particularly careful with:
- Personal insurance policies.
- Personal borrowing costs.
- Loan capital repayments.
- Fines and penalties.
- Costs which have both a company and personal purpose.
Once again, a non-allowed or personal cost doesn’t become tax-deductible simply because the company paid it.
Need more advice? Get in touch.
If you have any questions about insurance, finance costs or business expenses generally, contact the Integro team; we’re always happy to help.
Click here to get in touch with the Integro team.
Also read our complete guide to limited company expenses for more information on the costs you can claim through your limited company.
