Allowable expenses for limited companies explained

Keeping your costs and expenses under control as a limited company is one of the key foundations of good financial management. But did you know that some business costs qualify as ‘allowable expenses’ that can be claimed back to reduce your tax bill?

Let’s take a look at what allowable expenses are, how they can be claimed and the impact they can have on the tax efficiency of your limited company. 

What are allowable expenses for limited companies?

Allowable expenses are the business costs you can claim back against your overall tax liability for the period. 

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They are expenses that are ‘wholly and exclusively’ for business use. In other words, they’re the eligible tax-deductible expenses that you incur in the day-to-day running of your business operations. They cannot include personal expenses and the expenditure must be 100% business-related. 

How do allowable expenses affect your profits and corporation tax bill?

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When you file your annual corporation tax return, you have the option to claim for the allowable expenses that are tax-deductible for a UK limited company. When you claim eligible expenses, this lowers your overall net profit and, as a result, your tax liability for the period in question.

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The more tax-deductible expenses you claim, the smaller your tax liability will be and the less you’ll need to pay in corporation tax. As such, claiming allowable expenses allows you to reduce your tax bill, save money and reinvest those savings. 

What counts as ‘wholly and exclusively’ for business use?

Expenses that are ‘wholly and exclusively’ for business use are the costs that are incurred in the everyday, operational activities of the business. They cannot include the director's personal expenses or areas like client entertainment etc. 

Common categories of allowable business expenses

Many of your day-to-day business expenses will fall under the ‘allowable expenses’ category. Knowing what costs are tax deductible (and which are not) helps you manage your expenses more effectively, so you’re maximising the potential expense claims when you get to year-end. 

Common allowable expenses include:

• Staff salaries, pensions, and National Insurance: The staff costs of paying your workforce are considered an allowable expense. The main stipulation is that the salaries, wages, pension contributions and National Insurance contributions all relate to employment that’s wholly and exclusively for business purposes. 
• Office costs: To run your business, you need an office. You can claim the costs of running this office, including overheads like rent for the premises, utilities costs (gas, electricity, phone and broadband etc.) and office supplies like stationery, paper and printer toner etc. You can also claim home office expenses in some circumstances. 
• Travel and subsistence: If you or your employees have to travel for work purposes, you can claim back costs like car mileage, train fares, plane tickets and the costs of accommodation and meals etc. All travel must be for business purposes and cannot include entertainment or personal leisure activities. 
• Professional fees: In the course of running the business, you’ll engage a number of professional advisers. Costs for accountants, tax advisers, lawyers and solicitors etc. are all tax deductible, as long as the advice is purely related to the running of the business and not your own personal affairs. 
• Marketing and advertising: Promotional activity, like sales, marketing and advertising, is generally an allowable expense. But there are circumstances where sales and marketing can’t be claimed. For example, if the expenditure is capital in nature, doesn’t meet the ‘wholly and exclusively’ rule, or the promotional activity includes business entertainment. 
• Equipment, IT and software: Equipment, machinery and IT infrastructure costs can be claimed as a tax-deductible expense. Again, any expenditure must meet the ‘wholly and exclusively’ rule and any assets, plant or machinery can only be used for business purposes. 

Expenses you cannot claim as a limited company

Not all business expenses are recognised as allowable expenses under HM Revenue & Customs' (HMRC) rules. Where the incurred costs are not 100% related to business usage, the costs won’t be recognised as tax deductible.

Non-allowable expenses include:

• Client entertainment: Taking your prospect out for a meal, or running a drinks party for existing clients, does not count as an allowable expense. 
• Fines and penalties: Any fines and penalties you incur as a business won’t be recognised as a tax-deductible expense. 
• Personal expenses: As a director, if you run up costs that are unrelated to the company’s business activity, these won’t be accepted as allowable expenses. 
• Certain capital costs: Some capital expenditure won’t be seen as an allowable expense unless the cost has been structured through a capital allowance.

Are charitable donations tax-deductible for companies?

Yes, charitable donations to a not-for-profit organisation are tax-deductible and will reduce your corporate tax liability. You can donate cash, equipment, land, property, shares, seconded employees and sponsorship payments under the current rules.

Record-keeping and staying compliant with HMRC’s rules

To be able to claim an allowable expense, you need evidence of the cost to the business. This will generally mean having a receipt or invoice that shows the amount you paid, whether VAT was included or excluded and who the supplier was. 

This starts with good record keeping, with a clear and effective bookkeeping and accounting system in place. 

If you’re using cloud accounting software, like Xero or QuickBooks, to run your accounts, you’ll already have an excellent system in place to record all your business transactions. Using an automated bookkeeping tool, like Dext or AutoEntry, makes the process even easier by automating the process of scanning and digitising your paper receipts and saving the e-invoices you receive from suppliers. And mileage apps, such as Tripcatcher, do the same for capturing your business mileage. 

With a digital accounting app stack, you have access to a full audit trail of all transactions and expenditure. This is important for sharing the relevant documents and information when filing your tax return. 

Having this digital audit trail of expenses is also vital if HMRC decides to carry out a tax compliance check on your business. HMRC operatives will want access to all your financial information and digital copies of receipts. This helps the authorities check if you’re compliant with UK tax legislation and have documentation to support your expenses claims. Having incomplete records will slow down the audit and could lead to penalties. 

How long should you keep receipts and records?

You must keep records and receipts for 6 years from the end of the last company financial year they relate to.

You may have to keep the records longer if:

• they show a transaction that covers more than one of the company’s accounting periods
• the company has bought something that it expects to last more than 6 years, like equipment or machinery
• you sent your Company Tax Return late
• hMRC has started a compliance check into your Company Tax Return

Maximising your tax efficiency for expenses

Your accountant may talk about ‘tax efficiency’ but what is tax efficiency? And how does the way you manage your expenses factor into this?

Tax efficiency is the strategic and lawful use of available reliefs, allowances and business structures to minimise your limited company's corporation tax liability. By using corporate tax-planning strategies to structure your expenses, you can maximise the available reliefs and allowances. This reduces the company’s tax bill and frees up capital that can be reinvested back into the business.

Making use of the available allowances for limited companies

The UK Government offers a range of allowances and reliefs that you can claim as a UK-based limited company. These allowances are generally used to encourage enterprise, innovation and investment in specific areas or industries. 

For example, research & development (R&D) tax relief helps you claim back the costs of carrying out R&D activity. You’ll need to prove that you’re advancing knowledge and innovation in your given sector or industry, but claiming R&D tax relief is a great way to cut your corporation tax bill while also developing your core offering.

You can claim capital allowances on plant and machinery that you use in the business. As long as these expenses meet the eligibility test, you’ll be able to deduct the full cost of these items from your profits before tax using the annual investment allowance (AIA). Being able to deduct these costs makes it easier to invest in the plant and machinery you need, while lowering your corporation tax bill. 

Working with professional advisers to lower your tax liability

Getting your allowable expenses right can be a complex and confusing task. There are multiple allowances, reliefs and tax deductible items that your limited company may be able to claim. But navigating the system as a layperson is a challenge.

Working closely with your accountant and tax adviser helps you come up with a tax-planning strategy and expense-management process that maximises all of the available reliefs. Your adviser can also keep you compliant with HMRC rules, record-keeping requirements and deadlines – so you stay 100% compliant. 

iwoca: helping you bridge the cash gaps while you wait for tax relief

Being able to claim back the costs of your allowable expenses is a major bonus for your working capital. But tax allowances and reliefs are not immediate. You won’t feel the major capital impact until year-end when your tax bill arrives.

A flexible small business loan from iwoca helps you expand your working capital throughout the year. Our loans are fast and easy to apply for, with funds available in your bank account in a matter of hours. 

With an iwoca Small Business Loan you can:

• Borrow from £1,000 to £1 million
• Get a decision in 24 hours 
• Repay early with no fees
• Pay back the loan from 1 day to 60 months

Apply for an iwoca business loan

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