What expenses are tax-deductible for limited companies?

Introduction

Business expenses are the costs incurred from the day-to-day operation of a limited company. Fortunately, you can mitigate many of these costs by claiming these expenses back on your Company Tax Return. There are many expenses that you can claim on your tax return that you might not be aware of. Savvy business owners often make smart use of business expenses to reduce their tax bill legally, for example, by deducting expenses on equipment, insurance, and services.

In this guide, you’ll discover the various forms of allowable expenses that you can take advantage of as a limited business owner to maximise capital and devote more finance to your business’s growth.

What are tax-deductible expenses?

According to HMRC, an allowable expense refers to any cost “incurred wholly and exclusively for the purposes of the trade, profession, or vocation”.

In essence, a tax-deductible expense is any purchase made by a business solely for its day-to-day operations.

Running a company can be expensive, especially during its early stages. Many of your upfront costs may require substantial capital to get the business up and running. Therefore, whether to appease investors or reduce the strain on your own personal finances, it’s always good practice to find ways to mitigate costs.

One way to do this is to claim money back on tax through allowable expenses. Allowable expenses can include necessary costs incurred while running your business, such as purchasing stationery, renting office space, or paying broadband charges. These expenses come in all shapes and sizes and vary depending on the type of business.

The costs of these allowable expenses are taken away from your total business income, which in turn reduces the amount of corporation tax you need to pay at the end of the fiscal year. This means you can invest more of your finances in your business.

You can calculate your total taxable profit by using the formula below:

Total taxable profit = total business income – allowable expenses

Note that total business income is all the profit that your company earns at the end of its fiscal year.

Understanding dual-purpose expenses

If you incur an expense that has both a business and personal use, this fails HMRC’s “wholly and exclusively” rule outright. As such, it is exempt from being deductible in full.

That being said, HMRC also has policies outlining that, if the business portion of an expense can be clearly defined, then rather than claiming the full expense as tax-deductible, you can claim a portion of it back as an expense.

For instance, if your limited company is based at home, you can claim back a portion of the energy costs as an expense. This calculation is based on the square footage of your home office compared to the rest of your home, as well as the time you spend using the space for business purposes.

Allowable expenses vs. capital allowances

You can use both allowable expenses and capital allowances to reduce the amount of tax you pay overall. Allowable expenses refer to the general costs that a business incurs on a day-to-day basis. Capital allowances are a type of tax relief given to a business over time on long-lived assets.

Assets that qualify for capital allowances are:

• Equipment
• Machinery
• Business vehicles

Whereas allowable business expenses include:

• The day-to-day costs of running your business
• Items that you buy and sell through your trade
• The interest payments and finance costs for buying assets

You claim both tax deductions in different sections of your yearly Company Tax Return.

Types of allowable expenses

HMRC provides a handy list of allowable expenses that companies can use to claim back money on their annual Company Tax Return. To make things simpler, we’ve curated and categorised the most frequent examples of allowable expenses so you know what to look out for as a business owner.

Office and homeworking

Whether you're based at home or in an office, your business can take advantage of several location and utility-based allowable expenses to help lower your corporation tax bill to HMRC.

Types of allowable expenses include:

• Rent for business premises
• Business rates and water rates
• Light, heat, and energy
• Insurance for business premises
• Security costs
• Repairs and maintenance (not improvements)
• Office and home working

In an office environment, most of these allowable expenses will meet the “wholly and exclusively” rule set out by HMRC. However, if you work from home, only a portion of each expense will be deductible in accordance with the dual-purpose rule.

Travel, accommodation, and mileage

If your limited company conducts business that requires travel, you may be able to claim the full cost back as allowable expenses. This may include everything from transportation charges to hotel accommodation and meals.

Types of allowable expenses include:

• Train, bus, air, and taxi fares for business journeys
• Hotel accommodation for overnight business trips
• Meals as part of an overnight business stay
• Vehicle insurance, servicing, and repairs
• Petrol and oil
• Vehicle license fees and breakdown cover
• Vehicle hire charges
• Parking charges

You cannot claim the costs of daily commutes as business expenses, as they are treated as a form of private travel. You may also struggle to claim expenses back if your trip had both business and personal functions, unless there is a clear and evidenced split in these activities.

Equipment and software

Everything that helps you conduct your business day-to-day, from computer programmes to pens, can be tax-deductible.

Types of allowable expenses include:

• Stationery
• External hard drives or monitors
• Industry-specific tools (e.g. camera equipment for photographers)
• SaaS tools – accounting software, CRM systems, design software
• Cybersecurity software and antivirus protection

The capital allowance vs. allowable expense argument can become complex here, as items like computers can be mistaken for a business expense when they should be considered long-term assets and claimed back through capital allowances.

Professional services

Your company may seek to employ external help, such as hiring an accountant to tidy up your books. As a professional service, you can claim this back as a business expense.

Types of allowable expenses:

• Bookkeeping services
• Tax advice relating to the business (not personal tax)
• Company secretarial services
• HR or employment-law advice
• Business consultancy or strategy advice

However, if you use this same service for personal reasons, such as receiving personal finance advice from your company’s accountant, this would be considered personal use and render the service exempt from full tax deduction.

Staff costs and benefits

If your limited company employs people, all the costs that go to your workforce are tax-deductible.

Types of allowable expenses include:

• Wages and salaries
• Employer's national insurance
• Bonuses
• Benefits
• Payments to agency staff or subcontractors

You can also claim money back if you host events for your staff, such as Christmas parties, which are tax-deductible up to £150 per head.

Marketing and advertising

If you pay for advertising services, such as branded promotions or digital ads, you can claim these back as business expenses.

Types of allowable expenses include:

• Google Ads or social media advertising
• Website hosting and domain registration
• Branding and logo design
• SEO and marketing consultancy
• Email-marketing software subscriptions

If you outsource your advertising to an external company, you can still claim it as a business expense, categorised as a professional service rather than in-house advertising expenses.

Financial and legal fees

You will incur various charges to both comply with and enhance the financial and legal standing of your company, such as Companies House registration fees. These can all be claimed back as business expenses.

Types of allowable expenses include:

• Business credit-card fees
• Loan arrangement fees (spread where required)
• Payment processing fees (e.g. PayPal)
• Legal fees for reviewing commercial contracts
• Debt-collection fees for unpaid invoices

Fees related to any of the above, as well as company formation, trademarks, and patents, are allowable. Costs incurred for personal matters, share issues, or non-trading litigation may be restricted or disallowed.

Insurance

Limited companies purchase various types of insurance policies to ensure the business is protected from dangers like fire, cyber attacks, and robbery.

Types of allowable expenses include:

• Public liability insurance
• Employers’ liability insurance
• Cyber insurance
• Product liability insurance
• Office contents insurance

Personal or domestic policies, like home contents, would not be claimable unless they had some business element.

Pre-trading expenses

Limited companies can often claim costs incurred before they begin trading. This means you can claim back all startup costs, provided they are wholly and exclusively for future trade, as allowable expenses on the first day that your business becomes operational.

Common types of allowable expenses include:

• Company formation legal fees
• Accountant's advice before trading begins
• Industry software purchased shortly before incorporation
• Laptops or equipment bought in anticipation of trading
• Market research costs

Calculating your pre-trading expenses is a helpful way to reduce your upfront costs and maintain more capital to dedicate to running your business.

Pensions and payroll

Like staff payments, pensions and payroll fees make up a significant portion of allowable expenses for limited companies.

Types of allowable expenses include:

• Workplace pension contributions
• Payroll software subscriptions
• Outsourced payroll processing fees
• Auto-enrolment compliance costs

For limited company owners and directors, employer pension contributions are one of the most tax-efficient deductions available.

What isn’t allowed as a business expense?

Business expenses don’t qualify for a tax reduction if they're not solely for the purposes of the company. HMRC will challenge costs like:

• Personal clothing
• Daily commuting
• Client entertainment
• Fines and penalties
• Mobile phones
• Childcare

If you tried to claim any of these costs back as an allowable expense, your tax return would be incorrect, and you would face a penalty fee for providing false information to HMRC.

How to claim expenses and capital allowances

Business expenses and capital allowances are both claimed through your Company Tax Return (CT600), which you can access through this portal.

When you submit your application, you will need to know:

• Your total annual profit was
• The total amount of allowable expenses you accrued within your 12-month accounting period

You will input your allowable expenses in the accounts section of the tax return. Capital allowances are claimed separately in the tax computation.

How to keep track of business expenses for tax purposes

To successfully process business expenses, you must keep good records. If HMRC audits you, you'll have to pay a substantial fine if your books are not in order. This can be as much as £3,000.

To accurately record business expenses, you must keep track of:

• Receipts
• Invoices
• VAT receipts (if VAT-registered)
• The business purpose of each expense

You can choose to manually input all this information into a spreadsheet, such as Excel or Google Sheets, which is useful if your business is young and you don’t have the finances to hire a bookkeeper.

If your business is growing or you expect it to scale soon, consider investing in accounting software to streamline your business expense recording process.

If you want expert guidance on running your company efficiently and structuring it accordingly, take advantage of 1st Formations' extensive support and services today.