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Top Ten Claimable Expenses for Limited Companies

Let’s start with a thought experiment. I’ll set the scene. You’re a limited company owner, and you, as the director, are the sole employee. You also - understandably – love learning about tax. You open up the Monday morning paper to find some exciting news - HMRC has hinted there are going to be some big changes in the upcoming UK budget.....

Clare DohertyThis Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

Never one to miss the spectacle that is the UK budget, you block off your calendar. You even buy your partner a nice overnight spa trip - sometimes you just have to absorb the cost of an uninterrupted budget.

A few weeks later, the time comes. You lock the doors, black out the windows and turn on the TV, eyes wide, salivating in anticipation. You can barely contain yourself as you wait for the usual glitz, glamour and fireworks that UK budgets are known for.

We can all relate here, yes?

Time goes by, but with ten minutes left to go, there’s been no mention of the big news. You stick with it though; you’re sure this is going to be monumental. Chancellor Philip Hammond, the showman that he is, is almost definitely going to end with a bang. One minute left… thirty seconds left… it almost feels like it was all a ruse, some kind of sick joke.

Then, with ten seconds to go, he utters the words that would shake the world:

“Lastly, as of today, limited companies will only be able to claim tax relief on ten categories of expenses. This is part of our new initiative ‘Making Tax Difficult’. Unlucky; choose wisely! Peace.✌”

Big Phil drops the mic and walks off.

What a budget. No-one saw that coming.

While this is exactly the kind of dramatic showstopper you tuned in for, this is bad news for you, as a limited company owner. You try calling your accountant, but it’s going straight to voicemail. No wonder, this is a state of emergency; a tax apocalypse. Your accountant’s clients are calling  like there’s no tomorrow. You’ll never get through.

What on earth are you to do?

The Basics:

After some deep breathing and a few YouTube meditation videos, you are focused and ready. This doesn’t have to be so difficult; you just have to start from the basics. And the most basic principle is:

You can only claim expenses which are wholly and exclusively related to your company activities..

You should endeavour to categorise the expenses as best you can. Most bookkeeping solutions offer easy to understand categories ; if you think that advertising costs should maybe go into the travel costs section then you probably need to engage the services of a bookkeeper.

Admittedly, if you do make a category error, the net effect on your tax bill is zero. The odd categorisation error can be forgiven. On the other hand, claiming expenses which are not allowed could see your company liable for unpaid tax plus interest and penalties. Definitely not worth it.

Be warned:

In the event of a tax enquiry, the time spent on admin is costly. You may have to delay jobs, even stop working, and therefore earning, temporarily. Meanwhile, you’ll be racking up fees from your accountant for time spent conducting the boring, monotonous aspects of the process. Secretly, you suspect, they’ll be loving every minute of it. Maybe they will, if they enjoy engaging in seemingly endless correspondence. HMRC still use fax you know.  Fax. In 2019.

Make sure you only claim allowable expenses.

While the above scenario may exist only in our heads here at TaxKings HQ, in the event of such a #TaxApocalypse, what are the top-ten expense categories you could claim tax relief on?

Travel/Accommodation

Let’s say your work takes you all over the place and travel and accommodation is one of your most frequent expenses, that seems like a good place to start.

When it comes to business trips, you can include business travel by train, bus, plane or taxi, hotel rooms and meals during the trip. You’ll get full tax relief for these expenses against company profit.

If, however, you paid for your partner’s hotel for the spa trip with company money, that’s what we call a “benefit in kind”. That means you pay personal tax/NICs on it. Why? Well, quite frankly you shouldn’t really have paid for it from the business bank account in the first place. It’s not an allowable expense because it’s not wholly and exclusively related to company activities.. In fact, it could prove very counter-productive; if you take a journey for both personal and business reasons, it is disallowed in its entirety meaning that you actually miss out on potential tax relief.

Now I’ll let you in on a secret; what if you have contracts that will run for a few years? Did you know, that you can actually pay for future business trips, and claim the tax deduction in the current year?  It might be an idea. Hammond will hopefully come to his senses and do away with “Making Tax Difficult”, but for now, you need all the tax relief you can get.

It’s important to note, though, that a workplace ceases to be temporary if you’ve worked there for more than 24 months and so travel and accomodation at that workplace becomes a regular commute, and therefore not allowable against tax.

Vehicles

If the company owns a vehicle, you can include business-related car or van costs. You can claim corporation tax relief for fuel, repairs, vehicle insurance, servicing and even your breakdown cover.

Sounds good, right?  Hold on there. If you have a company car, this is classed as a benefit to you personally. This means the company will have to pay NICs at 13.8% and you’ll need to declare the benefit-in-kind on a P11D form and personally pay NICs on this benefit too. The tax on company cars can be as high as 37% for a car with high emissions of CO2. If a car cost £50,000 and you are a 40% taxpayer, you could pay £50,000 x 37% x 40% = £7,400 in tax. Not so good. In fact, it often ends up costing you, the director, more in personal tax than the company saves in tax. Not really what we’re trying to achieve here.

Often it’s actually far better to use your own car then claim mileage back from the company for business trips. HMRC’s approved mileage rate is currently 45p per mile up to 10,000 miles (25p thereafter), which usually works out higher than the actual fuel costs. This is because it factors in repairs and maintenance too, so make sure you pay those personally. This lowers your business profit (and corporation tax liability) and puts personal tax-free money in your pocket.

Note: You can’t claim for the cost of travelling between home and work; commuting to your business premises isn’t allowed.

Tip: Buying a van instead of a car can be tax effective as, generally, you CAN claim 100% of the costs, less an allowance for personal use.

Phones/Internet

A company director using a phone for business wouldn’t be entirely outside the realms of possibility, would it? Nope.

In fact, a phone is one of the most common business expenses. If your mobile phone contract is in your company name and used predominantly for business then the entire bill could be claimed as a business expense.

It is possible to use your own personal phone and claim back a portion of this, but you will be required to apportion costs for business and for personal use – tricky.

This also extends to tablets with data plans, or even mobile wifi so you can use the internet when you’re on the move. For many businesses, the variety of apps available today can help streamline business processes, so it could be worth looking into.

Let’s imagine instead, that all of your work is done from home, via the internet or “the cloud”. It may even make sense to install a second internet connection on a business contract to ensure that you can upload and send large files (graphic designers, video editors – we’re looking at you). This gives you some tax relief, and stops you using up the bandwidth while your partner enjoys some Netflix.

Pensions

Paying into pension is not only tax efficient, it’s like being able to pay yourself another salary. You may have to wait a while to get it, but if you have surplus funds, this can be a very (very) tax efficient means of reducing company profits.

If you’re normally an employee, you’d be forgiven for thinking “but surely I only pay in a small fraction of my salary per month?” However, you’d be wrong. Currently, a company can pay up to £40,000 per year into a private pension pot for the director, subject to some restrictions which you can learn about here [link to Salary v Dividend article].

Let’s assume you’re 50 years old. You’ve started your own consulting company, reaping the benefits of a long career’s worth of knowledge. You’ve been bringing in more and more, and you’re running out of ways to reduce the taxable profits. You’re taking a tax-efficient salary, but with personal income of £50,000 you are now in the higher-rate tax threshold.

By paying some excess company profits into a pension, you will reduce the company’s taxable profit, while also deferring tax on the income and avoiding the dreaded higher-rate. This could be quite useful if you are planning to retire in the next 10-15 years though, even if you’re a young professional, it’s worth considering making some contribution.

Note: As an accountant, I can only advise on the tax outcome of pension payments. Everyone’s situation is different, so only an IFA (an Independent Financial Adviser) can tell you whether or not this is the right investment for you. You should always consult a professional when considering any kind of investment.

Using your home as an office

Once again – this is another expense where the cash ends up in your pocket. If you work from home then you could be able to claim a proportion of your household costs and utility bills as expenses. This amount is calculated by looking at the number of rooms in your property, rooms that are used for business purposes and of course, the percentage of time that those rooms are actually used for work.

It’s always a great excuse to send the family away - make sure you pay for it personally - crack open a few cold ones and get fired into an absolutely humongous spreadsheet.

If, for some inexplicable reason, that doesn’t get you hot under the collar, then there is a much simpler method. The cost could be claimed at the HMRC approved rate of £4 per week. However, that’s only £208 per year. If you use a large portion of your home, or you work from home a lot, you may find that a spreadsheet is worth the hassle (it’s really not as big an ordeal as I made out).

Staff Training

It’s often said that the best investment you can make, is in yourself. While it doesn’t end up in your pocket, your company will get a tax deduction on staff training costs. Improved skills can offer a competitive advantage, and if a qualification or certificate is the only thing standing between you billing £30 per hour and £70 per hour, it’s a bit of a no brainer.

There is one key point here; training is only allowable if you are improving upon existing skills for company employees (including directors). If you wished to learn a new skill in order to offer a new service via your company, then unfortunately you will have to absorb the cost yourself.

If you run an engineering company, paying for yourself, friends or family to take a pottery class is unfortunately not a company expense, although it could spruce up your home office.

Professional Services/Subscriptions

Freelancers who are just starting out might, just might, manage to get by with template contracts and tax advice from online articles (I know, imagine!). However, the time may come where you take on a larger contract; great news. The thing is, bigger contracts mean bigger risk. Why not use some of that increased profit pragmatically?. Our advice: pay a solicitor to ensure you aren’t signing your company’s death warrant.

Likewise, tax advice from articles (other than this one, of course) can be outdated, poorly worded, or may not apply to your circumstances. A good tax adviser will save you multiple times their fee, in good and timely tax advice.

Both are examples of professional services which are tax deductible for all companies. Other professional fees - financial advisers, consultants and so on – will depend on your company’s circumstances.

And of course, professional subscriptions and memberships are also tax-deductible. For example, an engineering company may choose to become IET members; a law firm can pay for subscriptions to The Law Society, etc. As long as it’s related to your industry, it’s an allowable expense.

Plant/Machinery/Equipment

These are known within your accounts as non-current assets. Or tangible non-current assets if you want to get really pedantic about it. A non-current asset is basically anything that you physically own that is likely to be used by the company over a long period of time. Computer equipment used to be the go-to example here but with the reduction in cost and lifespan of laptops and tablets now it is often better to claim them as regular expenses.  A better example would be if you ran a printing company and bought a printing machine.

You’ve printed to exhaustion over the last 11 months, and you have a good amount of profits as a result. Let’s say £50k. At 19% corporation tax, that would leave you with a £9,500 corporation tax liability. You do some window shopping, and find a faster screen printing machine that could double your output for £45k.

You purchase the machine, and your leftover profit becomes £5,000; the corporation tax on this comes to just £950 – excellent.. Your business can now churn out jobs twice as fast (or twice as many jobs).

Now alternatively, let’s say the company paid Spreadsheet Phil that £9,500 in corporation tax. You start your new company year. You’re just checking your emails when, all of a sudden, that big contract we talked about comes in. You have a look for  that all-singing-all-dancing screen printing machine that you had your eye on but realise, after you paid last year’s Corporation Tax, you’re £4.5K short.

You phone up HMRC to see if Hammond & Co will send the tax back, but after two days of enduring the HMRC hold music, you are weary and tired. All the food in the fridge has gone off, and the dogs are starving (you monster). Your partner threatens to leave. You put down the phone and give up. Your customer gives the additional work to another company.

Of course, this can extend to computer equipment, vans, CNC machines, up to £1M per year. It all depends on whether the cost is wholly and exclusively related to the company activities of course. Boats are normally allowed for commercial activities. That yacht you’ve always had your eye on, not so much.

Similarly to investing in yourself or staff via training, you are investing in the company by updating its equipment. Just be smart and make these kinds of purchases before your company year ends.

The Christmas Night Out

Did you know that you are allowed tax relief on the cost of an annual night out? That’s right, entertaining your staff members plus their partners – just one each, we shall assume monogamy, or tell them they’ll have to draw lots - annually is viewed as an allowable company expense.

You can include meals, drinks and possibly accommodation for a small team of employees. One proviso – the cost cannot exceed £150 per head. If it does then the ENTIRE EXPENSE is disallowed. One of you better stay sober then.

So why not treat your staff? It can help morale, it can reduce your tax liability, and it may even give you a few good - possibly hazy - memories.

Advertising, Marketing and PR

This one covers a wide range of expenses. Some are more obvious than others – for example, taking out an advert on a website, or in a local paper, TV even. Or, you might hire a marketing consultant and/or graphic designer to handle a company rebrand.

Companies are often surprised when I recommend branded work wear – this is especially useful for engineering or construction industry companies, although any company can purchase a branded uniform in principle.

In fact, there are many branded promotional items which a company can claim tax relief on. From mugs, caps, and t-shirts, to pens; even updated business cards. You can claim the cost of running email newsletters, pay-per-click advertising, and SEO services, as well as the cost of creating or updating your own website. There’s also the cost of advertising events, putting on a networking event or running a promotional campaign. There’s a lot to choose from in this category.

If the company has gained all of its business via word of mouth thus far, why not consider getting a website before the company year ends? Or maybe you could ask clients for an email address, and set up a monthly email newsletter to showcase your new stock/products?

Let’s take our example of the printing company from earlier. The company had £5,000 left over after purchasing the machine. Since it’s fully equipped to handle bigger workloads, wouldn’t it make sense to put some of the remainder towards bringing in new customers?

Conclusion

Fortunately for you (and me), there is no “Making Tax Difficult” initiative and there is no tax apocalypse. For all we moan and groan about them, HMRC aren’t that evil (yet).

Hopefully though, our emergency scenario has given you some great ideas of expenses a company can claim tax relief on; anything which is wholly and exclusively related to the company activities is fine by Phil (and us).

Of course, the importance of tax planning - and knowing when you should make these purchases - cannot be understated. You may not think you need to make a purchase now, but a review of your tax position before the end of your accounting year might change your mind, especially when it comes to larger purchases. Be smart; put your excess profits to work.

And please remember to feed your dogs.

Clare DohertyThis Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

This article was published in our Guides section on 01/05/2019.

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