Business expenses are relatively straightforward but can become more complex as you dig deeper. As an owner/executive of a limited company, it is important to know the business expenses you can claim. They provide a valuable means of reducing your company profit and, in most cases, your corporation tax liabilities.Before we take a closer look at the array of expenses you can claim as a business, it’s essential to be aware of the broader rules.
Rules covering business expenses
While the devil is always in the detail, these are the broad rules used to cover the claiming of business expenses:-
- Expenses must relate exclusively to the running of your business
- With dual-purpose charges, only the element relating to business can be offset
- Typically, expenses would be paid by the company but can be reclaimed by an employee, where they pay out of their own pocket
- The vast majority of expenses can be offset against corporation tax, but there are exceptions
- It’s essential to keep an accurate record of charges to the business AND proof of payment
If your expense claims abide by the above five rules, there is every chance the business can cover them.
Payment of business expenses
As we mentioned above, there are two main ways in which business costs can be covered:-
- Directly out of the business bank account
- Paid by an employee out of their own funds
These are two legitimate ways of covering business expenses, but when it comes to an employee reclaiming their business-related costs, there must be a paper trail. Consequently, many companies will create a specific procedure for reclaiming costs, including a form covering all of the required information.
Does HMRC monitor business expenses?
It would be unwise to try and reclaim a business expense without evidence, as any future HMRC investigation would not look favourably on this scenario. Where there is no physical proof of the payment, even if it is legitimate, there is every chance that HMRC would reject the claim. Regularly claiming expenses without proof could also act as a red flag to the authorities and lead to an investigation and potential penalties.
Cutting-edge technology allows HMRC to review current and historic company reports and accounts, comparing and contrasting business expenses, profits and tax liabilities. Where there is a significant change in, for example, business expenses, this could prompt an investigation into a company. You must keep your records up-to-date and accurate, with evidence of charges to the business. You never know when HMRC may come calling!
List of business expenses
When looking into business expenses, you will soon notice that different industries have costs which are unique to their operations. Consequently, compiling a comprehensive list of all business charges is impossible. However, the following covers many typical business running costs.
The general rule of thumb for business insurance is that if the premiums are tax-deductible, any insurance payments received directly by the company will likely be treated as business income, impacting the company’s corporation tax liability. This might include key person insurance, insurance against loss of profits and any other type of cover directly related to the business.
Where insurance specifically covers payments to third parties, such as public liability insurance, the premiums can still be offset against expenses. However, as the company is not receiving a settlement, there is no additional tax liability on any pay-out.
While marketing is relatively broad, if the expenses are directly related to the business, they can be offset against profits and corporation tax. It is essential to recognise that this covers one-off and regular marketing costs.
When on company business, the subject of accommodation often attracts several different views. However, the regulations here are relatively straightforward; if the stay is business-related, it can be reclaimed. There are also allowances covering drink, food and travel expenses, although under HMRC rules there are limits.
Any interest or bank fees charged to the company account can be offset against profits as a bona fide business expense.
Working from home
The cost of working from home has come under closer scrutiny due to the pandemic and what many see as a long-term shift in working patterns. As a rule of thumb, you can reclaim an element of household costs and utility bills at a standard rate of £6 per week. It is also possible to calculate specific business use rates for particular rooms and offset this as a share of your overall household costs/utility bills. This is more complex!
Regarding additional expenses such as heating, lighting, business telephone services and even postage and printing charges, these are direct business costs and, as such, can be claimed as an expense. It is essential to differentiate between the cost of using a room and the direct business expenses related to working from home.
This brings us all to the age-old quandary of telephone expenses and whether HMRC allows any degree of personal use. They don’t!
If a phone is used solely for business, 100% of the cost can be offset against profits. Where the phone is used 50/50 for business and personal use, only 50% of the overall cost can be offset against business profits. In many ways, it is simpler to have separate phones for business and personal use, then there is no blurring of the lines.
Many will be surprised to learn that the cost of a Christmas party and other open employee events are tax-deductible up to £150 per employee per year. To be tax-deductible, these events must be open to all employees, which would likely mean that an event specifically for company directors, as one example, would not be seen as a legitimate company expense.
The cost of events outside of this allowance (and the criteria) would likely be seen as a benefit in kind, creating a potential tax liability for employees.
The cost of equipment, computers to office chairs, printers to desks, industrial machinery and similar items, are legitimate business expenses. Capital expenses are offset against profits over several years as opposed to 100% in the year of expenditure. In the past, when a company was particularly profitable, it may have invested heavily in equipment, offsetting all or part of the costs and reducing the tax liability. This is why the gradual offset against business income was introduced, creating a “fairer” reflection of the company’s financial position.
One note of caution, depreciation is an acceptable business expense but cannot be offset against your tax liability. However, in this instance there may be capital expenditure allowances you can utilise.
Staff training is not only an allowable cost but also a legal responsibility for most companies operating in the UK. Legitimate training costs can be offset against taxable business profits, encouraging companies to invest in their employees.
In addition to the above, the following are also recognised business expenses:-
- Travel costs
- Pension contributions
- Start-up costs (going back up to 7 years before trading commences)
These expenses, with the exception of entertainment, can be offset against profits and tax liabilities. While entertainment can often be claimed as a genuine business expense it will not impact profits or company taxes.
It’s essential to take advice
As you can see from the above information, HMRC recognises many legitimate business expenses, but not all can be used to offset profits and corporation tax. It is vital to take advice from your accountant concerning any general and specific expenditure you have in mind. The majority of expenditure is likely unavoidable, but where there is a degree of discretion, there may be various capital allowances you can use.
As ever, the devil is in the detail regarding expenses and the ability to offset them against profits and, ultimately, corporation tax. While many of the regulations are relatively straightforward, there are areas of uncertainty where you may need additional advice and planning. Our team of experts have experience across the board and will be able to assist you on the subject of business expenses and offsetting against taxes.