EXPENSES CONTRACTORS CAN CLAIM
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What is tax relief?
Are you a seasoned veteran of running a limited company or just starting out for the first time as a company director? Whatever the case, there are often business expenses that go unclaimed, which means you could end up paying more tax than you need to. We’ve put together this page to help you make the most of the tax relief available to you.
Being savvy with your expenses is a large part of running a successful business, regardless of its size. Claiming business expenses is a simple way to keep your business tax efficient – it reduces your profit, which in turn reduces your Corporation Tax liability and payments. By claiming every allowable expense, you’re making sure you don’t pay a penny more in tax than you have to.
Remember: the general rule is that expenses must be “wholly, exclusively and necessary” for business purposes. However, HMRC rules can be complex and are often based on concepts such as the ‘fairness’ and ‘reasonableness’ of expenses claimed. There may also be an impact on the amount of personal tax you pay. In this guide, we’ll be running down all the main types of HMRC approved business expenses you can claim as a limited company for tax purposes.
But it’s not just about knowing what to claim, how do you actually go about claiming it? Do you just keep a list, or throw all the receipts in a shoebox? (here’s our first tip – don't just do that!). There are a variety of methods you can use, depending on the type of expense.
If you need help with your limited company accounts or in claiming your expenses, you can give our expert advisors a call and discover how Karia Accountants can help your business.
Allowable business expenses reduce the amount of profit on which companies pay Corporation Tax. So, more allowable expenses means less taxable profit and less tax to pay. As you always want to keep on HMRC's good side, you need to make sure you only claim for expenses that are on HMRC’s approved list.
To account for your expenses properly, you need to keep accurate records of everything. Bear in mind that you’re legally bound to keep these records for at least six years.
As ever, HMRC rules on what is tax-deductible can be complex and are often based on concepts such as the ‘fairness’ and ‘reasonableness’ of expenses claimed. When in doubt, always contact an accountant such as Karia Accountants for advice.
Claiming expenses as a limited company
You can either pay your company’s expenses directly from the company business bank account or as a ‘reimbursed expense’ when paid by you personally. It’s important to remember to keep an accurate record any time you reimburse yourself from the company funds.
If you run a small business, your employees can also claim expenses, so it’s good practice to have a company expense for and policies – i.e. how much employees are allowed to spend and in what situations – and collect and file all the expense claims at the end of each month. Here, it’s also important to stress that your employees must keep all receipts to be able to reclaim any expenditures.
How to keep a record of limited company business expenses
Keeping track of your limited company business expenses such as business mileage is essential, as, without the breakdown of journeys and mileage covered, HMRC could refuse to accept your claim.
We suggest detailing all your business mileage on a spreadsheet and keeping it up-to-date throughout the year. If you’re claiming tax relief for fuel when using a company-owned car, you must keep hold of all of your receipts. We’ve got an article explaining everything you need to know about business mileage.
For other business expenses, the cost of anything that’s necessary for running your limited company will receive tax relief – the trick is to make sure you meticulously record everything so you don’t lose out. You’re not limited to a certain amount of supplies, within reason.
If you’re not using online accounting software the best way to keep track of what you’ve spent on supplies and other expenses such as travel and subsistence is, again, in a spreadsheet. The main difference is you don't have to record each item separately – for example, if you bought 10 packs of 100 pens at £3 each, you can record it as 1000 pens – £30. It is, however, important to keep the receipts for every separate purchase. Receipts must be kept for six years after you have filed your returns, as HMRC could decide to investigate at any point within this time.
If you're just away for the day, you can claim lunch costs if you exceed five working hours, this extends to dinner if you’re working up to ten hours. As always, ensure that you keep receipts for everything. It’s also advisable to log all expenses in your accounting software, or on a spreadsheet so that you always have the date and exact costs at hand in case HMRC decide to take a closer look. Also be aware that HMRC take a dim view of excessive use of taxis, particularly if they appear unnecessary – i.e. it was a very short journey.
Storing receipts can be done in a variety of ways and it’s always best practice to keep the paper copies somewhere safe, as well as backing them up digitally – with a picture on your phone for example (receipts tend to fade, but digital backups will remain pristine forever).
Accountancy fee expenses for limited companies
You can claim tax relief for the full cost of your limited company’s accountancy fees, providing the accountants’ time is spent working wholly on your company’s affairs. If the accountants provide advice or spend time working on your personal affairs (such as preparing your personal tax return) this can be included in your limited company accounts but will be taxable to you personally, and needs to be recorded as 'benefit in kid' (BIK). In addition, your company will pay National Insurance Contributions at 13.8% on the BIK (for the 2019/20 and 2020/21 tax years).
Accommodation costs and expenses whilst on business travel
You can claim expenses for accommodation costs when you travel to a temporary workspace or location for business-related purposes, providing the expense is reasonable and not excessive. HMRC will likely question any excessive claims for expensive hotels or apartments with more than one bedroom. So, sorry, but staying at the Ritz is probably not going to be acceptable!
Advertising, marketing, and PR
Generating leads and advertising is an important part of running a successful business. You need to make sure that your potential customers know about your products or services, which is where advertising, marketing, and PR comes in. This may be a one-off cost or an ongoing charge and as long as the service exclusively for your business then the cost could be classed as an expense.
Bank, credit card and other financial charges
Many types of bank charges can be claimed as an allowable business expense, though they must be for accounts or cards in the name of the business. You can claim business costs for:
bank, overdraft and credit card charges the interest on business and bank
loans (but not repayments of the capital or loan amount)
hire purchase interest
alternative finance payments, for example, Islamic finance.
You cannot claim for repayments of personal loans, overdrafts or finance arrangements.
Business Insurance policies
You can claim for any insurance policy for your business, for example, professional indemnity insurance or public liability insurance.
Business mileage expenses
If you’ve used your personal car or van to get to a temporary place of work and paid for the fuel personally, you’re entitled to get this back from your company. You can even claim mileage expenses if you ride a bike. But no matter how you travel you cannot claim for miles commuting to your regular workplace. If you use your personal vehicle for business travel to a temporary workplace or location you can claim the following rates:
The great thing about this is that not only does the business expense reduce your overall Corporation Tax bill, it also means you can reimburse yourself the amount claimed. If your company owns the car, however, you can only claim the cost of fuel.
Car, van and travel expenses as a limited company
Your travel expenses are generally tax-deductible where all the following conditions apply:
You are responsible for paying the travel costs
The travel you are undertaking is necessary for your work, i.e. your attendance at the place you are travelling to is mandatory
The travel should not be 'ordinary commuting'. HMRC defines a commute as the journey you make between your home and permanent workplace.
You can claim allowable business expenses for:
repairs and servicing
vehicle licence fees
train, bus, air and taxi fares
meals on overnight business trips
You can’t claim for:
non-business driving or travel costs
travel between home and work
Charitable donations as a limited company
Your limited company pays less Corporation Tax when it gives the following to charity:
equipment or trading stock (items your company makes or sells)
land / property / shares in another company (shares in your own company don’t qualify)
employees (on secondment)
You can claim tax relief by deducting the value of your donations from your total business profits before you pay tax.
Tax-Free Childcare scheme
In 2017, the government started to roll out a new Tax-Free Childcare scheme for parents and carers. Please note that your limited company cannot provide an employee with childcare using both schemes at the same time, it’s one or the other.
Christmas party and staff event expenses through your limited company
Your company can host an annual event – most commonly a Christmas part – as a tax-free benefit, providing you meet certain conditions.
Your employees may invite a partner but you must not exceed an expenditure of £150 per head (including VAT). The event must cater mostly for staff. For example, expenses for one director and a plus one would be acceptable and would give you a budget of £300. However, if those attending are not mostly employees then it would be difficult to argue the event's main purpose is to entertain staff. Note that the £150 amount is an annual limit and can cover multiple events for staff.
With certain, limited exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it is a genuine expense of your trade or business. Tax relief is therefore not available.
If you’ve incurred the cost of business entertaining personally you may be able to claim the expense as being incurred in the performance of your duties as a director. These costs would be disallowed in the company profits, so the net effect would be the same as not claiming the expenses in the first place.
Equipment expenses for your limited company
The cost of anything that’s necessary and essential for your duties as a director will receive tax relief. This covers computer equipment, printers, and software. You may also claim reasonable relief towards the cost of equipping/furnishing an office, e.g. chairs, bookcases and so on. This may appear to hold a dual purpose, but it’s allowed because it is a consequence of a business need. As long as the personal use is insignificant it will not be treated as a 'benefit in kind' and you won't have to pay personal tax on it.
Eye tests and glasses or spectacles
You can claim for vision tests providing it’s necessary for the initial or continued use of visual display equipment in your duties. However, you aren’t able to claim for glasses or contact lenses unless they’re prescribed during your time at work, specifically for 'monitor or screen work'.
Fees and expenses for forming your limited company
The costs associated with setting up your limited company are business expenses and attract tax relief. This covers all the relevant expenses, anything from printing to supplying the necessary equipment for your company. Any accountancy fees or mandatory company formation costs you pay can also be claimed.
Fixed assets and disposals of fixed assets
As long as they’re entirely purchased for business use, items such as laptops, PCs, business phones and furniture can be recorded as a business fixed asset. If the asset is obsolete or no longer used by your business, you may decide to dispose of it.
whether you continue to use a fixed asset, sell old models or scrap them, HMRC will need to know in order to ensuree it's correctly accounted for each year.
General office costs and purchases for your limited company
Minor purchases with receipts that are used wholly, exclusively and necessarily in the performance of your duties are claimable. This includes postage, computer consumables, and office stationary.
Gifts and trivial benefits from your limited company
You don't have to pay tax on a gift or benefit for your employee if all of the following apply:
it cost you £50 or less to provide
it isn’t cash or a cash voucher
it isn’t a reward for their work or performance
it isn’t in the terms of their contract.
This is known as a 'trivial benefit'. You don't need to pay tax or National Insurance or let HMRC know.
You have to pay tax on any gifts or benefits that don't meet all these criteria.
Legal and other professional fees
As long as they are directly related to your business, legal fees and other professional fees are allowable.
Medical insurance (Healthcare) expenses through your limited company
Your company may provide financial support towards medical insurance for employees. This is regarded as a 'benefit in kind' and the employee must pay personal tax on it. Your company will be liable to National Insurance Contributions at 13.8% (for the 2019/20 and 2020/21 tax years).
Your company can provide the following and claim tax relief:
medical insurance for an employee working abroad
an annual check-up
Mobile phone, landline and broadband expenses as a limited company
If your landline phone contract is only for business use, this is an allowable company expense and you won’t be taxed personally. By having a separate phone line for ‘only business’, it shows this is 100% for business.
For mobile phones, provided the contract is between the company and the mobile phone provider, the company can claim all costs as an allowable expense.
If your company pays your entire personal phone bill, you'll have to pay a 'benefit in kind’ (BIK) charge on the total amount of the bill, and your company will pay National Insurance Contributions at 13.8% (for the 2019/20 and 2020/21 tax years) on the same amount (minus the cost of any business calls you can identify).
If you make a claim for business only calls made on your personal mobile or landline phone bill, this is an allowable expense provided you can prove it was a business call. You can also reclaim the VAT element of the business calls (if you‘re VAT registered), but you won’t be able to reclaim any part of the line rental, as you would incur this cost anyway.
It's increasingly difficult to separate the cost of business calls, given the way mobile (and many landline) operators package call costs (e.g. ‘up to 2,000 free monthly minutes’).
If you can’t separate the business element from your personal use of your mobile phone, you cannot make a claim, due to the duality of purpose rules, as any business calls you make incur no extra cost on top of the tariff you already pay for personal calls.
If you start to carry out some of your work from home, using your residential broadband, you cannot make a claim if the broadband was already in place, unless you can clearly split the business from the personal element. Having two broadband lines could show one line is 100% for business.
If you have no broadband contract at home and need internet access to carry out your business, the cost can be reclaimed from your company, and no 'benefit in kind’ charge arises.
Pension payments through your limited company
Once your company has set up a contract with a pension provider it can make payments into your pension and receive 100% tax relief as an allowable business expense. In the 2019/20 and 2020/21 tax years, there’s a limit of £40,000 on how much you can contribute free of tax to a pension scheme either through your company or personally.
Professional subscriptions such as membership of a trade body, or registrations needed in order to enable you to trade are allowable, provided they are HMRC- approved professional bodies which are relevant to your employment. If it is not directly relevant, then it’s not allowed. Membership of your local golf club is not going to be allowed no matter how much you think it may help your business!
A salary paid to you as an employee or as the director of your company is regarded as a allowable expense, as are any National Insurance Contributions (NICs). You may pay a tax-efficient salary up to the relevant National Insurance threshold, i.e. before you become liable to start paying NICs. You'll be more tax-efficient by paying a lower monthly salary, because after you cross the relevant NI threshold you'll have to begin paying NICs.
Travel and subsistence expenses as a limited company
If you have to travel for your work you may be able to claim tax relief on the cost or money you’ve spent on food or overnight expenses. You can claim tax relief for money you’ve spent on things like:
public transport costs
hotel accommodation if you have to stay overnight
food and drink
congestion charges and tolls
business phone calls and printing costs.
You can’t claim for travelling to and from work, unless you’re travelling to a temporary place of work.
Training expenses through your limited company
You can claim for training courses that are aimed at improving the skills you apply in your work. Additionally, you can claim travel and accommodation while attending a training course.
HMRC often disallow expenses for courses such as MBAs, as they offer new skills and knowledge rather than building on existing skills. In certain situations, they are allowed, but only if you demonstrate that they are reinforcing/improving your existing knowledge/skills.
Use of your home as an office when you're a limited company
Working through a limited company means if you work from home, from April 2020, HMRC allows you to claim £6 each week without keeping any detailed records – this equates to £312 per year (this increased from £4 a week or £208 per year in the previous tax year). The other good news is that HMRC doesn’t believe this is to be a benefit in kind, which means you won't have any tax to pay on this through your Self Assessment.
As always, there are rules: you must be able to prove that you regularly spend time doing your job in this office space, so you can't just use your home office for a small bit of administration while the majority of your work is done on-site or at client offices.
Equipment that is necessary and essential for your professional duties will receive tax relief. You may also claim reasonable relief towards the cost of equipping/ furnishing an office, (for example chairs or bookcases).
Renting your office to your business
You might be able to rent your personal workspace in your home to your limited company and claim that as an expense. You’ll need to declare these earnings on your Self Assessment, so they’ll be subject to further taxes after you’ve deducted your expenses. HMRC requires you to:
own the property
make sure any amount over £208 per annum is classified as rental expenses
create a rental agreement between yourself and your limited company
make sure that the rental agreement states that the rent is specifically for use of the office at certain times of the day, and nowhere else within your house is used
make sure the rent you set is reasonable.
HMRC rules are complex in this area and they expect any calculation to be ‘fair and reasonable’. You should speak to Karia Accountants before preparing a rental agreement between you and your company.