How Expenses Work for a UK Limited Company
As a UK limited company, understanding how expenses work is crucial for managing your finances and reducing your tax bill - as well as staying on the right side of HMRC !
So, what are expenses? Expenses are costs incurred by the company in the course of doing business, and they can be claimed back to reduce the company's taxable profits. However, not all expenses are allowable, and it's important to know which ones you can claim and how to claim them correctly.
Allowable expenses include costs that are wholly and exclusively for the purpose of the business, such as office rent, salaries, and travel expenses. These expenses can be deducted from the company's profits before tax is calculated, which reduces the amount of corporation tax that the company has to pay. To make sure that you claim expenses correctly you need to keep accurate records and ensure that everything is properly documented and supported by receipts or invoices. Failure to do this correctly can result in penalties from HMRC and (potentially) a higher tax bill!
Understanding Limited Company Expenses
Not all expenses are equal. The two categories are ‘allowable’ and ‘disallowable’ expenses’. Misunderstanding what category your expenses fall into can be a costly mistake, as you may either fail to claim expenses that you should - resulting in paying higher tax, or you may claim expenses that you shouldn’t - putting you at risk of failing HMRC’s audit.
Allowable Expenses
Allowable expenses are costs that are incurred wholly and exclusively for business purposes.
Examples of allowable expenses include:
Office rent and utility bills
Staff salaries and benefits
Business travel and accommodation
Professional fees, such as accountancy and legal fees
Office equipment and supplies
It's important to keep records of all your expenses, including receipts and invoices, as HMRC may request to see them as part of a tax inspection.
Disallowable Expenses
Non-allowable expenses are costs that are not incurred wholly and exclusively for business purposes. They cannot be deducted from your company's profits and will not reduce your corporation tax bill.
Examples of non-allowable expenses include:
Personal expenses, such as clothing and food
Fines and penalties, such as parking fines and speeding tickets
Depreciation of assets, such as cars and buildings
Claiming Expenses
To claim expenses, you need to keep accurate records and submit them to your accountant or bookkeeper who will then deduct the expenses from your company's profits and calculate how much corporation tax you need to pay.
You need to remember that you can only claim expenses that are incurred wholly and exclusively for business purposes. If you're unsure whether an expense is allowable, it's best to seek advice from a professional accountant or tax adviser.
By understanding how expenses work for a limited company in the UK, you can ensure that you're claiming all the allowable expenses and not paying more tax than necessary.
At Blue Skies, as one of the leading media accountants in the UK, we’ve worked with limited companies for over 2 decades and helped 1000’s of businesses stay on the right side of HMRC. If you’re not sure what you shouldn’t be claiming as expenses, or if you need support in managing your company’s finances while you focus on growing the business, contact us today on 01767 699996 or thecrew@blue-skies.tv.
Types of Allowable Expenses
As a UK limited company, you can claim various expenses that occur as part of the running of your business. Here are the different types of allowable expenses:
Office Costs
Office costs refer to expenses incurred in running and maintaining your business premises. These include rent, utility bills, business rates, repairs, and insurance. You can also claim for office equipment such as computers, printers, and furniture.
Travel Expenses
If you travel for business purposes, you can claim for the cost of travel and accommodation. This includes train, bus, and taxi fares, as well as hotel bills. However, you can’t claim for any personal expenses such as meals or entertainment.
Staff Expenses
If you have employees, you can claim their salaries, bonuses, and pensions. You can also claim for expenses incurred by your employees while on business trips, such as travel and accommodation costs. But, you aren’t able to claim for any personal expenses incurred by your employees.
Legal and Financial Costs
Legal and financial costs refer to expenses incurred in running your business, such as accountant fees, legal fees, and bank charges. You can also claim for expenses incurred in raising finance, such as interest payments and fees for arranging loans.
Marketing and Entertainment
Marketing and entertainment expenses refer to expenses incurred in promoting your business, such as advertising costs and website development fees. You can also claim for expenses incurred in entertaining clients, such as meals and drinks. But, as with other categories, you can’t claim any personal expenses incurred while entertaining clients.
Disallowable Expenses
However, there are certain expenses that are not tax-deductible. These expenses are considered to be ‘disallowable expenses’ and aren’t able to be claimed as a reduction in your company's taxable profits.
Here are some examples of disallowable expenses:
Personal expenses: Any expenses that are not wholly and exclusively for business purposes cannot be claimed as a tax deduction. This includes expenses such as private phone calls, personal clothing, and non-business travel expenses.
Capital expenses: Expenses that are incurred for the purchase or improvement of fixed assets, such as property or equipment, are not tax-deductible. Instead, they are treated as capital expenditure and may be eligible for capital allowances.
Fines and penalties: Any fines or penalties that your company incurs, such as late filing penalties or parking fines, are not tax-deductible.
Entertainment expenses: Expenses incurred for entertainment purposes, such as taking clients out for meals or drinks, are not tax-deductible.
It's extremely important to keep accurate records of all your expenses, including disallowable expenses, to ensure that you’re paying the correct amount of tax. By keeping your records up-to-date, you can ensure that you are not claiming for any disallowable expenses and avoid any potential penalties from HMRC.
Remember, disallowable expenses are expenses that cannot be claimed as a tax deduction. Personal expenses, capital expenses, fines and penalties, and entertainment expenses are all possible examples of disallowable expenses.
Tax Implications of Expenses
When it comes to expenses for UK limited companies, there are several tax implications that you need to be aware of. This section will cover some of the key considerations.
Corporation Tax Relief
One of the main benefits of claiming expenses is that they can be used to reduce your company's taxable profits. This means that you'll pay less corporation tax, which can be a significant saving.
VAT on Expenses
If your company is registered for VAT, you can usually claim back the VAT on eligible expenses. This means that you'll only pay VAT on the net cost of the expense, rather than the gross cost. But you must keep accurate records of your expenses and VAT payments, as HMRC may ask to see them as part of a VAT inspection.
PAYE and National Insurance
If you pay expenses to your employees, you may need to deduct PAYE tax and National Insurance Contributions (NICs) from the payments. This will depend on the type of expense and whether it's taxable or non-taxable. For example, if you pay for your employee's travel costs, this may be taxable if the employee would have been entitled to a tax deduction if they had paid for the costs themselves.
Record Keeping and Reporting
It’s crucial to keep accurate records of your business expenses to avoid possible fines, penalties or investigations. This will also help you to claim tax deductions and reimburse your employees for their expenses. Here are some key things to keep in mind when it comes to record keeping and reporting:
Documenting Expenses
You should always keep receipts, invoices, and other relevant documents for all your business expenses. These documents should include the date, amount, and description of the expense. You can use a spreadsheet or accounting software to keep track of your expenses if you choose to. This will make it easier to calculate your tax deductions and prepare your financial statements.
Expense Claims
If you have employees, they may need to claim expenses for business-related purchases. You should have a clear policy in place for how to do this. You can use expense claim forms or software to make the process easier. Make sure that your employees provide receipts or other documentation to support their claims. You should also have a process for approving and reimbursing expenses.
Reporting to HMRC
You will need to report your business expenses to HM Revenue & Customs (HMRC) as part of your tax return. As part of this you’ll need to provide details of your expenses, including the total amount spent and the categories of expenses.
You can choose to do this yourself, or use an accountant to help you track, categorise and accurately report on your expenses.
Common Misconceptions About Expenses
When it comes to expenses for UK limited companies, there are several misconceptions that may cause confusion. Here are some of the most common ones:
You can claim any expense as a business expense
While it’s true that you can claim many expenses as a business expense, there are some expenses that are not allowed. As mentioned, you can’t claim expenses that are not wholly related to your business, such as personal expenses. Additionally, some expenses may be partially allowable, such as the running cost of a vehicle that is used for both personal and business purposes.
You don't need to keep records of your expenses
Keeping an accurate record of all of your expenses is essential for several reasons. Firstly, it can help you to claim all the expenses that you are entitled to, which can reduce your tax bill. Secondly, it can help you to avoid any penalties if HMRC decides to investigate your expenses. Additionally, it can help you to manage your cash flow and make better business decisions.
You can claim all expenses in the same year that they were incurred
While you can claim many expenses in the same year that they were incurred, some expenses may need to be spread over several years. For example, if you purchase a piece of equipment that will be used for several years, you may need to claim the cost of the equipment over its useful life. Some expenses may also be subject to capital allowances, which means that you can claim a portion of the cost each year.
Tips for Managing Company Expenses
Managing company expenses can be a daunting task, but failing to keep track of them can impact your business profits, tax burden and growth. Here are some tips to help you manage your company expenses more effectively:
1. Create a Budget
Creating a budget is the first step in managing your company expenses. It will help you keep track of your spending and ensure that you are not overspending in any one area. Make sure to include all your expenses, including fixed costs like rent and utilities, as well as variable costs like travel and entertainment.
2. Keep Accurate Records
Make sure to keep receipts for all your expenses and record them in your accounting software or spreadsheet. This will help you track your spending and ensure that you are not missing any deductions when it comes time to file your taxes.
3. Set Spending Limits
Setting spending limits can help you control your company expenses and prevent overspending. You can set limits on individual expenses or on categories of expenses. This will help you stay within your budget and ensure that you are not overspending in any one area.
4. Review Your Expenses Regularly
Reviewing your expenses regularly is essential for managing your company expenses. It will help you identify areas where you are overspending and where you can cut back. Make sure to review your expenses at least once a month and adjust your budget as necessary.
For more information, or to speak to a member of our team to find out how we can help you and your business, contact us today on 01767 699996 or thecrew@blue-skies.tv.