As a Director of your own Limited Company there are certain items that, if purchased ‘wholly and exclusively’ for the business, can be claimed as business expenses. That is, they are off set against your Corporation Tax. Your company doesn’t get to claim the money back, but your taxable income is reduced by the amount of the allowable expense.
How this works is quite straightforward. If you claim £1,000 of various allowable business expenses in your year-end accounts, the taxable income of your company is reduced by that £1,000. This reduction, assuming a Corporation Tax rate of 20%, saves you £200.
If your company’s turnover was £10,000 and you didn’t claim the expenses you would pay tax on the full £10,000. When you offset your £1,000 of expenses the taxable income is revised to £9,000 and your company pays less tax. There are other factors that affect your tax liability such as your PAYE salary and dividends, but this provides a basic understanding of how expenses impact your tax position.
The key rule when claiming an allowable expense is that it should be “wholly, exclusively and necessarily incurred in the performance of your day to day business”. There should be no Benefit in Kind, essentially personal gain, to you. Please note that reimbursed expenses will be reported on a form P11D after the end of the tax year, please review the P11D frequently asked questions should your require any further information in respect of the forms P11D.
Managing Business expenses
Expenses may be incurred in one of two ways: paid for personally and then reclaimed from the business as a Reimbursed Expense or; paid for directly from the company bank account as a Business Expense.
Although there is no specific legal requirement, you should run a separate bank account for your company. This makes it much easier to manage your business expenses and monitor your financial situation. Payments from this account should be solely for the purposes of the business and not mixed with private expenditure.
There will be occasions where you incur business expenses from your personal income. You are entitled to claim these back from your company through a process known as Reimbursed Expenses. These can include specific items, but also cover Business Travel Expenses and Worksite Travel Costs. You can see in the above example the tax implication of claiming allowable expenses. You should detail the Reimbursed Expenses claim and attach supporting receipts or mileage logs when submitting them to your company.
Before you reimburse yourself, always consider the potential Benefit in Kind and check the available profit in your company. Remember that any expense claim, although tax efficient, reduces the funds available for salary and dividends.
Direct business expenses
Direct business expenses incurred can be offset against your company’s Corporation Tax as long as they are allowable. HMRC has specific guidelines on what is considered allowable and not all expenses meet their criteria. With this in mind you need to understand the types of business expenses you can claim and the implications for your company’s tax position.
There are various expenses to consider that relate to the structure and function of your company and its business: Capital Assets, Purchasing a Vehicle, Working From Home and utilising Phone and Broadband services. Also how your company interacts with and supports clients and employees: Entertaining Expenses, Employer Supported Childcare Scheme and The Cycle to Work Scheme. Remember, as an employee of your limited company these schemes may benefit you.
There are other expenses involved with the promotion and other activities of your company such as: Marketing and Advertising, Sponsorship Costs and Charitable Donations.
Claiming expenses can have a considerable effect on your business through tax implications and available income for salary and dividends. As such, all claims, whether a direct or reimbursed business expense, should be considered carefully.