How Do Expenses Work?
Running a company of any size comes part and parcel with business expenses. HMRC allows you to count many running costs against your annual turnover before calculating Corporation Tax.
Claiming allowable expenses can make an enormous difference to your tax bill. For example, if your shop’s yearly revenue is £50,000 but you spend £20,000 on overhead, stock and staff wages, your taxable profits are £30,000. Corporation Tax is currently charged at a flat rate of 19%. By deducting allowable expenses, you would pay £5,700 in Corporation Tax for the year, rather than £9,500—that’s a saving of £3,800.
If you operate as a sole trader, you’ll need to follow a different process—we explain it all in our article What expenses can I claim as a self-employed person?.
What Counts as a Business Expense?
HMRC says that you can deduct any business costs from your profits before tax, but precisely what constitutes business costs is a little unclear.
As a rule of thumb, purchases must be for company use only and need to be necessary to run your business. If you or an employee make personal use of an item it will have to be taxed as a company benefit, also known as a benefit in kind. That means that the person who benefits from the purchase is required to pay income tax on its value.
Remember to Keep a Record of Your Business Expenses
It’s essential to keep evidence of all of your expenses, big and small. You will need to keep hold of receipts for six years after filing your tax return in case HMRC decides to investigate.
This process doesn’t need to be difficult; you can just slip receipts and invoices into a ring binder as you receive them. Make sure every record includes the date, where you bought it, what you purchased and how much you paid.
Examples of Allowable Limited Company Expenses
There is no exhaustive list of allowable business expenses—every company is different, after all—but we’ve compiled some of the most common company expenses to get you started.
Premises and Equipment
- Rent on business premises
- Overhead and utility costs
- Security, porterage, carriage and removals
- Rental of storage units
- Stationery, business cards and printed materials
- Reference books or other media directly related to your business
- Software subscriptions or software that will be used for no longer than two years
- Data protection registration and renewal fees
- Product warranties
- Ink, toner and paper for in-house printing
- Computer consumables, such as CDs and external hard drives
- Packing materials and labels
- Postage and courier charges
- Telephone, mobile and Internet costs, but only if the contracts are in the company’s name
Purchases that will stay with your limited company for longer than two years, such as computers, printers and kitchen equipment, fall under capital allowances.
Goods for Resale
- Products that you buy in order to resell, such as clothes and food
- Raw materials that you make into products, such as soapmaking supplies
- Costs that are directly related to your products, such as factory overhead
Wastage (such as unsold food or damaged products) should not be counted as a separate expense.
Marketing and Promotional Expenses
- Advertising and marketing costs for your company, including but not limited to print advertisements, social media promotion and content writing
- Other promotional costs, such as product photography, web design and website maintenance
- Free samples and branded gifts
- Sponsorship, for example, branded sports kits*
- Magazine and journal subscriptions that HMRC deems relevant to your business
- Membership of a trade body or professional organisation
It’s a common misconception that client entertainment and meals are allowable business expenses. You can claim expenses on gifts worth under £50, but they must be branded with your company name or be a clear advertisement. Food, drink and tobacco are not permitted.
*Donations to charity are not allowable expenses, but sponsorships are. In order to qualify, there must be a clear financial benefit to your donation (such as endorsement of your brand).
Travel Expenses
- Flights, accommodation and meals while on a business trip
- Visas, inoculations, travel insurance, travel cancellation fees, roaming charges
- The cost of family visits when staff work overseas for longer than 60 days
- Travel and parking expenses when travelling to sites other than your regular workplace
- The lease on rental vehicles
- Rental vehicle insurance
- Licenses, congestion charges and other business-related fees on vehicles
You cannot claim expenses on your daily commute, but if your business relies on travel (for example, if you run a courier service) your travel between clients is covered.
While this may seem obvious, no tax relief is allowed on penalties or fines. This includes speeding tickets and parking fines.
Staff Expenses
- Employees’ salaries, including your own
- Employers’ National Insurance contributions
- Contributions to an executive pension scheme
- Recruitment agency fees
- Training courses, but only when directly related to the job
- Uniform, costume or protective clothing, including cleaning and repair
- Staff parties and events—worth up to £150 per employee, per year
- Childcare costs—up to £243 per employee, depending on income tax band
- Up to £8,000 in relocation costs for new employees, subject to very strict criteria
Legal and Financial Expenses
- Bank account charges, including interest and monthly fees
- All kinds of insurance, such as public liability insurance
- Professional services, such as accountancy, legal advice and land surveying
- Costs of ongoing company administration, such as the £13 fee for filing your annual Confirmation Statement with Companies House
Bad Debts
If a customer does not pay you for your products or services, you may be able to claim the outstanding value as a bad debt.
In order to claim bad debts, the value of the transaction must be included in your company’s turnover and you must be certain that the debt will not be paid. One such example is when the client’s company has gone into administration.
You cannot claim expenses on:
- Repayments on mortgages or loans—only the interest or fees associated with them
- The cost of incorporating a limited company
How Else Can I Reduce My Corporation Tax bill?
Your business may qualify for other forms of tax relief. Check GOV.UK for further allowances and relief you may be entitled to.