Allowed Expenses for Limited Companies Explained
A detailed, evidence-based overview of allowable business expenses for limited companies, highlighting compliant claims, common errors, IR35 implications, and practical advice to keep your company tax efficient and regulatory-ready.
Understanding Allowable Business Expenses for Limited Companies
Navigating business expenses is a critical duty for limited company owners. When claimed correctly, expenses reduce your Corporation Tax liability and increase financial efficiency. However, even minor errors can trigger scrutiny or disallowance by regulatory bodies. Here, we examine the rules, common claimable expenses, pitfalls, and the implications of IR35—based on the latest HMRC guidance and statutory requirements.
"Expenses must be incurred wholly and exclusively for your trade. HMRC's business income manuals make this abundantly clear: dual-purpose claims seldom succeed."
Key Principles for Claiming Business Expenses
- Wholly and Exclusively Rule: Each expense must be incurred solely for running the business (HMRC BIM37000).
- No Duality of Purpose: Avoid claiming if expenses also serve personal purposes (HMRC BIM37600).
- Record-keeping: Maintain comprehensive receipts and documentation in anticipation of any HMRC query.
- Corporation Tax Impact: Most legitimate expenses reduce your taxable profits, but exceptions exist (for example, client entertainment is not deductible).
Accuracy in compliance doesn't only mitigate tax—it protects your company against costly investigations and unforeseen liabilities.
Methods of Payment: Company vs. Personal Reimbursement
Expenses can be processed via the company’s account directly or paid personally and later reimbursed. In both cases, eligibility and documentation requirements remain unchanged. Claims must always correspond to genuine, allowable business costs.
Comprehensive List: 30+ Allowable Expenses
Below is a structured summary, illustrating the major categories and nuances:
| Expense Category | Deductible? | Key Details |
|---|---|---|
| Accommodation (business) | Yes | Only while away on business (limited to 24 months per site) |
| Accountancy Fees | Yes | Only for company’s accounts, not personal tax return |
| Annual Events (e.g., Christmas) | Yes | Up to £150/person, including guest, per annum |
| Bank Charges/Interest | Yes | On company accounts and finance arrangements |
| Business Gifts | Yes | £50 limit per recipient, conditions apply |
| Childcare | No* | Potential personal relief via Tax-Free Childcare only |
| Clothing | Limited | Only protective equipment, not everyday wear |
| Company Admin (e.g., filings) | Yes | E.g., Confirmation Statement fee |
| Company Formation | No | Not deductible for CT, claimable as capital cost if personally funded |
| Computer Hardware/Software | Yes | Must be required for contract work |
| Salaries | Yes | For directors, employees, spouses if legitimately employed |
| Entertainment | No* | Client entertainment not CT-deductible, but reclaimable |
| Eye Tests & Corrective Glasses | Yes* | For those using screens regularly |
| Insurance (Business/Liability) | Yes | Must relate directly to trade |
| Life Insurance | Yes* | If structured as a relevant life policy |
| Marketing & PR | Yes | E.g., website, professional promotion |
| Medical Costs | No* | Some exceptions, like required health checks |
| National Insurance (Employer) | Yes | Company contributions only |
| Office Rental | Yes | Only ongoing costs, not deposit |
| Pension Contributions | Yes | Company contributions to director pensions |
| Relocation Expenses | Yes | Up to £8,000, subject to conditions |
| Smart Devices | Yes* | If in company name & used for business |
| Sponsorship | Yes | Only if generating quantifiable business benefit |
| Stationery & Peripherals | Yes | Business cards, postage, etc. |
| Subscriptions | Yes | Must be HMRC-approved professional bodies |
| Subsistence | Yes* | While away; subject to 24-month rule |
| Telecoms & Broadband | Yes | Only if in company name or proven business use |
| Training | Yes | Only if relevant to your contract role |
| Trivial Benefits | Yes | Gifts <£50/person on special terms |
| Travel & Parking | Yes | To sites other than normal, mileage rules apply |
| Working from Home | Yes | Flat rate of £6/week or proportionate apportionment |
*Refer to detailed HMRC guidance for exclusions and limits.
Highlights
- Expenses incurred solely for business benefit are typically deductible.
- Annual events, if organized inclusively and within the monetary limit, can be a tax-efficient morale booster.
- Legitimate training and upskilling costs, where directly relevant to business activity, encourage continual professional development.
"Each legitimate claim, properly documented and relevant to business, not only safeguards compliance but enhances overall tax efficiency."
Frequent Mistakes and Non-Claimable Expenses
The temptation to include personal or non-business costs—whether intentionally or through misunderstanding—is ever-present. Commonly disallowed claims include:
- Personal purchases with no business justification
- Non-business health services
- Dividends to shareholders (not an expense)
- Fees for directors’ personal tax returns
- Capital expenses (handled by capital allowances over time)
Remember: HMRC can and does challenge claims lacking evidence or rationale. Always seek clarification when in doubt.
Additional Advice and Further Reading
Key reminders for robust compliance:
- Pre-trading Expenses: Personal outlays before incorporation may often be reclaimed if certain criteria are met.
- Benefits in Kind: Personal benefits paid by the company (e.g., gym membership, company cars) can trigger additional tax for both director and company.
- Consult HMRC’s A-Z of Expenses and Benefits for authoritative guidance.
IR35 and Expense Claims
The IR35 rules directly affect both the scope and value of allowable expense claims. If your contract is caught by IR35, most expenses are not allowable, except a fixed allowance (5% of contract turnover) under specific circumstances. Since April 2021, this allowance is reserved for those contracting with small companies in the private sector.
| Scenario | Allowance | Additional Claims |
|---|---|---|
| Outside IR35 | Standard rules | All normal expenses |
| Inside IR35 | 5% allowance only (limited cases) | Section 198 (travel, pension only) |
Call to Action
If in doubt, always consult a qualified accountant who understands contractor-specific issues. Their guidance is invaluable in maintaining compliance, optimizing tax, and preventing adverse HMRC attention.
Disclaimer: This article provides a summary of current regulations and accepted practices based on HMRC guidance at the time of writing. Expense scope and tax laws are subject to change; professional accountancy advice is recommended for your specific circumstances.
