Tax-deductible expenses for limited companies

As HMRC will tell you, it’s important for your limited company to pay the right amount of tax.

But that rule cuts both ways – your company shouldn’t be paying tax on things that are legitimate business expenses.

If your company needs to spend money on something in order to run properly, then this may count as a tax-deductible expense.

These expenses can lower your overall corporation tax bill, and indeed can be a vital part of both cash-flow planning and improving your operating margins.

Taking advantage of tax-deductible expenses requires effective bookkeeping and financial reporting, as well as a good knowledge of the expenses that qualify.

What are tax-deductible expenses?

Businesses often have to spend a lot of money before they can make money. For instance, if you run a delivery company that requires a fleet of vehicles, you’ll need to buy these vehicles, fuel them and keep them roadworthy – all of which will cost money.

As your business couldn’t run without these vehicles, the money you spend on them isn’t taxed. Those costs are therefore deducted from the business’s gross income before that is subject to tax.

So if the business took £320,000 in the last year, but had £6,000 worth of tax-deductible expenses, only £314,000 would be taxed.

What allowable business expenses can I claim?

Many expenses are potentially tax-deductible, depending on the nature of your business and its ongoing requirements.

Here are some of the common ones:

• Office costs (e.g. phone and broadband bills)
• Travel costs for work travel (e.g. petrol, transport fares)
• Clothing expenses for uniforms or protective outfits
• Salaries and subcontractor costs
• Stock and/or raw materials for resale
• Financial costs such as bank or insurance charges
• Heating and lighting your business premises
• Rent on business premises and business rates
• Advertising and marketing costs

All such expenditure must be made solely for business purposes rather than personal use (although sometimes the line is blurred, such as when you work from home and claim for energy bills).

Expenses must also be rigorously documented if you want to claim back tax on them, so encourage this practice among your staff and ensure all receipts are kept and sent to your accountant.

A few business costs are not tax deductible. These include any legal costs that come from breaking the law (including parking tickets), and you also can’t claim on the legal costs that come with buying a new property.

And although work-related travel costs are covered, travel between your home and your workplace is not. Finally, despite what you may have heard, entertainment costs such as taking clients for dinner are also not tax deductible.

How should I treat employee expenses?

Some employee expenses are claimable as business expenses.

Your employees may incur certain personal expenses during the course of their work (such as buying lunch when out on assignment, or travelling to meet a client). When this happens, you can reimburse each employee through payroll.

Many of these expenses will in turn count as allowable business expenses. Make sure your employees always keep their receipts when claiming for expenses, so that you in turn can claim against those that are tax-deductible.

Can I claim the cost of buying assets as a business expense?

Buying assets (known as ‘capital assets’) is treated differently from business expenses. Capital assets are things that you will keep and use in the business, such as some vehicles (excluding cars), plant and machinery. You can claim capital allowances against the cost of buying these.

The Annual Investment Allowance (AIA)  allows businesses to spend up to £1 million a year on new assets and then deduct that cost from their taxable profits. There is also a 100% first-year allowance that let you claim back tax on an asset in the year you purchase it.

What are the disallowable, non-tax-deductible expenses?

There are some business expenses that are commonly thought of as being tax-deductible, which in fact are not. Make sure you don’t mistakenly try to claim against the following (this is not an exhaustive list):

1. Income paid as dividends

Although salary paid by the company is a tax-deductible expense, dividend payouts (which may form the bulk of your income as director) are not.

2. Entertaining clients

A lot of people get this one wrong. The cost of wining and dining clients is not an allowable expense. Entertaining employees, however, is.

3. Gifts to clients

Again, it’s a popular belief, but wrong. Only gifts worth under £50 can count, and these cannot be food, drink, tobacco or anything that carries an advertisement for your business.

4. Most legal fees

Generally the only deductible legal fees are those incurred by obtaining loans and patents and registering trademarks.

5. Fines

Since incurring fines isn’t necessary when doing business, you can’t claim them against tax.

6. Donations not made via Gift Aid

You need to remember to Gift Aid all charitable donations. Anything not qualifying for Gift Aid is therefore not tax-deductible.

7. Asset depreciation or improvements

Capital assets will usually decrease in value over time, but you can’t claim this as an expense. You also can’t claim against making improvements (e.g. renovations) to them. You can, however, claim for necessary repairs such as fixing utilities.

How do I claim my tax-deductible expenses?

Once you have all purchase records for the year and can prove how much you have spent on your business, it’s time to make the claim.

You do this through your annual self-assessment tax return. You won’t need to submit your records when you submit your tax return, but you should keep them ready as HMRC may ask to see them.

If you have more than a few business expenses to keep track of, it’s usually more efficient to have an accountant to take care of your bookkeeping.

If you're simply self-employed (e.g. a freelancer or sole trader) the expenses you can claim may be slightly different from those of a limited company.

Find out out allowable expenses for the self-employed.

Get expert financial advice

Your limited company’s financial health can benefit significantly from understanding and correctly applying your tax-deductible expenses.

By keeping thorough records and understanding what qualifies as a deductible expense, you can make the most of these opportunities to effectively manage your HMRC corporation tax liabilities and enhance your cash flow.

Stay informed about the latest tax regulations to ensure your limited company benefits fully and remains compliant.

Unbiased will match you with a qualified accountant or financial adviser for expert financial advice tailored to optimising your tax strategy and ensuring you make the most of allowable business expenses.