Starting and running a limited company in the UK comes with the potential for significant tax savings, and one of the key areas where this can be achieved is through claiming allowable expenses.
But what exactly are allowable expenses, and how can they help reduce your corporation tax bill by claiming the right tax relief?
Don’t have time? Here’s the wrap-up of this article in less time it takes to eat a taco 🌮
▪ Allowable expenses are business costs you can deduct from your taxable profits, reducing your tax bill.
▪ Expenses must be wholly and exclusively for business purposes to be considered allowable.
▪ Travel, accommodation, subsistence, and equipment expenses can often be claimed, provided they meet HMRC guidelines.
▪ 24-Month Rule: You can claim travel expenses for temporary workplaces, but not for permanent ones where you’ve worked for more than 24 months.
▪ Personal expenses, mixed-use assets, and non-business-related costs are not allowable.
▪ Records must be stored (physically or digitally) and retained for a minimum of 6 years. n.b. Stay Sharp, Stay Savvy and Keep Winning.
Skip right to…
- So What Can You Claim As A Business Expense?
- 1- What Are Allowable Expenses?
- 2- The Curious Case of Partial Use
- 3- Travel Expenses
- 4- Subsistence & Meals
- 5- The 24-Month Rule: Temporary Workplace
- 6- Accommodation Costs
- 7- Assets: Equipment, Plant, and Machinery
- 8- Mobile Phones & Internet
- 9- Accountancy & Legal Fees
- 10- Entertaining Clients
- 11- Annual Events
- 12- Trivial Benefits
- 13- Business Insurance
- 14- Working from Home
- 15- Subcontractors
- 16- Employees
- Conclusion
So What Can You Claim As A Business Expense?
1- What Are Allowable Expenses?
Allowable business expenses are the costs your business incurs that can be deducted from your income before calculating your corporation tax. These must be wholly and exclusively for the purpose of running your business. So, while you can claim the cost of a computer used for work, personal expenses like family holidays or personal shopping cannot be claimed.
It’s essential to keep accurate records of all allowable expenses, including invoices and receipts, and retain these for at least six years.
Organised digital storage solutions like Google Drive or Dropbox can help keep everything in check. Of course, you can keep everything nice and tidy, neat and clean, ready to be seen on your accounting software.
2- The Curious Case of Partial Use
When assets or expenses are used both for personal and business purposes, only the business portion is allowable. For example, if you use your mobile phone for work 60% of the time, then 60% of the monthly bill is considered an allowable expense. HMRC doesn’t want to pay for your binge-watching habit, but they will help with the costs of running your business!
3- Travel Expenses
Travel expenses are among the most commonly claimed limited company allowable expenses. While commuting to a permanent workplace from home doesn’t qualify, you can claim travel costs for work-related trips, such as meetings or client visits.
Mileage can also be claimed if you use your personal vehicle for business purposes.
HMRC allows:
▪ 45p per mile for the first 10,000 miles in a car
▪ 25p per mile thereafter
▪ 24p per mile for motorcycles. Unlimited miles claimable (ride to the moon, so long as you have business going-ons up there!)
▪ 20p per mile for bicycles. Same as above!
If your total business miles for the year are 12,000, you can claim £5,000 in allowable expenses: £4,500 for the first 10,000 miles, and £500 for the remaining 2,000 miles.
Don’t forget to claim other travel-related expenses like parking fees, tolls, and public transport costs when they are incurred for business purposes. All these costs are allowable company expenses that can be offset against your profits.
4- Subsistence & Meals
Meals can be claimed under HMRC’s Benchmark Scale Rates if you’re travelling for work.
Here’s what you can claim:
▪ Breakfast: £5 if you leave home before 6 am.
▪ One Meal (5 hours): £5 for trips over five hours.
▪ Two Meals (10 hours): £10 if you’re on the road for over ten hours.
▪ Late Evening Meal: £15 if you work later than 8 pm.
Meals at your regular place of work don’t count, but if you’re travelling to a temporary location, these costs can be claimed.
5- The 24-Month Rule: Temporary Workplace
To claim travel, subsistence, and accommodation expenses, your workplace must be considered temporary.
HMRC’s 24-Month Rule applies here: if you work at a site for more than 24 months, it is no longer considered temporary, and you should stop claiming these expenses.
6- Accommodation Costs
If you need to stay overnight for business purposes, your accommodation costs, such as hotels or B&Bs, are allowable. Just remember that if the accommodation is also used for personal reasons, you can only claim the business portion.
7- Assets: Equipment, Plant, and Machinery
Claiming for equipment is straightforward, provided it’s used exclusively for business purposes.
Computers, tools, and machinery used in your day-to-day operations qualify for capital allowances, which allow you to write off part or all of the asset’s cost against your profits in the first year.
8- Mobile Phones & Internet
You can claim the full cost of a company-provided mobile phone as an allowable expense, provided the contract is in the company’s name and used for business purposes.
If the phone is used for personal reasons, the claim will need to be adjusted accordingly. So for example, if you pay £30 pcm towards you personal mobile phone contract and use it for business 45% of the time, the claimable allowance is £13.50.
9- Accountancy & Legal Fees
Accountancy fees are fully deductible, as they are necessary to ensure your business stays compliant with tax regulations.
However, the cost of preparing your personal Self-Assessment tax return should not be claimed as a business expense.
10- Entertaining Clients
Business entertaining of current or potential clients can be claimed, but be aware that you won’t get Corporation Tax relief on these costs. These costs will be added back on during the corporation tax (CT600) computations.
Still, it’s worth claiming as a business expense to avoid paying out of your personal funds.
11- Annual Events
Your company can host annual events for employees, such as a Christmas party or summer gathering, without tax implications under certain conditions.
To qualify as an allowable expense and avoid it being classified as a taxable benefit for employees, the following criteria must be met:
▪ The total cost must not exceed £150 per head. This includes all associated costs, such as transport and accommodation, divided by the number of attendees.
▪ The event must be annual—something that takes place each year, like a Christmas party or a company anniversary celebration.
▪ The event must be open to all employees. You cannot restrict it to specific groups of employees; it needs to be inclusive.
If you host multiple annual events, the combined cost must not exceed £150 per head across all events. If these conditions aren’t met, the entire cost of the event (not just the excess) becomes taxable for the employee.
OMB Connect Top Tip: The £150 per head is not an allowance, but a threshold. So if the cost exceeds £150, the entire amount becomes taxable, not just the excess.
12- Trivial Benefits
Trivial benefits are small perks that employers can provide to employees without tax implications, provided certain conditions are met:
▪ Each benefit must cost no more than £50. This includes VAT and any delivery or service fees.
▪ The benefit cannot be cash or a cash voucher (i.e., it can’t be converted into money).
▪ The benefit must not be a reward for work or performance. It should be a genuine small gift, such as a birthday present or a token of appreciation.
▪ There must be no contractual entitlement to the benefit. It should be discretionary, not something employees can expect based on their employment terms.
For close companies (those with 5 or fewer shareholders), directors are subject to an additional rule: they cannot receive trivial benefits worth more than £300 in a tax year.
By using trivial benefits and annual events wisely, companies can provide perks to their employees while remaining tax-compliant, maximising their expense claims and optimising their overall tax position.
13- Business Insurance
Lucky number 13!
Taking out business insurance is highly advisable to protect your company from various risks.
The good news is that the cost of policies such as Professional Indemnity, Public Liability, and Employer’s Liability insurance is an allowable expense.
14- Working from Home
In the everyday running of your business if you’re working from home, you can claim a flat rate of £6 per week (£26 per month) for additional costs like heating, lighting, and water.
For higher claims, you’ll need to provide records of actual costs incurred.
15- Subcontractors
Many limited companies engage subcontractors to complete specific tasks or projects, especially in industries like construction, IT, and creative fields. Payments made to subcontractors for services provided are considered allowable expenses, as long as these services are directly related to the business’s operations.
You can claim the costs of paying subcontractors as a business expense, reducing your corporation tax liability. It’s essential to ensure that your subcontractor is genuinely self-employed and not classified as an employee by HMRC. If a subcontractor is reclassified as an employee, your company may be liable for National Insurance Contributions (NICs) and other employment taxes.
If you operate in certain industries, such as construction, the Construction Industry Scheme (CIS) might apply. Under this scheme, contractors must deduct tax at the source from payments made to subcontractors and send these deductions to HMRC. Be sure to follow the relevant guidelines and record all payments for accurate tax reporting.
16- Employees
You’re the sum of all your parts, and employees play a crucial role in any business.
If your limited company employs staff, their salaries, National Insurance Contributions (NICs), and other associated costs like pension contributions and statutory sick pay are all considered allowable expenses. These costs reduce your company’s taxable profits, meaning less corporation tax is due.
You must ensure that your company meets all legal requirements for employees, such as providing a workplace pension under the auto-enrolment scheme and filing regular PAYE reports to HMRC. Furthermore, the cost of employee training, as long as it is relevant to their role, can also be claimed as an allowable business expense.
Conclusion
That was a long read! Ideally, you would have skipped back and forth to the sections you’re interested in.
But by understanding and optimising your allowable expenses, you can significantly reduce your corporation tax bill and retain more of your business profits. Keep meticulous records, ensure that expenses are wholly and exclusively for business purposes, and take advantage of the reliefs available to limited company owners.
Here’s the deal: OMB Connect mission is to educate, entertain and empower. We aim to reveal the gate kept knowledge reserved for the few and help the many.
Get the free content and information you need. Share it with a friend, and when you’re ready Join us to upset the status quo.
This isn’t a disruption, it’s a revolution!
Until next time: Stay Sharp, Stay Savvy, and Keep Winning.