As a business owner, you can legitimately claim a range of different business expenses. These expenses reduce your company’s profit, which in turn lowers the amount of tax you pay. But of course, this also reduces the amount available to you personally, and so it typically won’t make sense to spend money purely to reduce your tax bill.
We’ve listed some of the more typical expenses, but if you have questions, or aren’t sure about an expense, just talk to us.
Let’s start with the ‘general rules’
Companies – HMRC’s basic rule for companies is that any expense should be “wholly and exclusively for business use”.
What does wholly and exclusively mean?
Typically, as a limited company director, there will be lots of things that you use both for business and personally. Common examples would be the home broadband costs, computers that the kids also use in evenings/weekends, and mobile phones.
If something has both business and personal usage, then, by definition, it is not wholly and exclusively for business purposes. However, where there is clearly a major business motive and personal use is “merely incidental”, HMRC may accept your claim.
Sole Traders – The rule here is slightly more lenient. Instead, you can typically claim a percentage of the cost that relates to the business use. E.g. if you use your mobile phone for business use 70% of the time, you can claim 70% of the related cost.
Pension
Contributing to a pension scheme can be very tax efficient. There are a few ways you can do this, but for the most tax benefits and the least admin, Maslins recommends using employer’s pension contributions. You can read full details on this and other ways to contribute to your pension on our beginner’s guide to pensions.
Travel
The good news is that travel for business purposes is allowable.
However, if your travel is considered ‘normal commuting’ – meaning going from home to a regular workplace – it cannot be claimed as an expense.
How ‘normal commuting’ works for contractors
Travel is allowable if you expect to work at a location for less than 24 months.
Travel is not allowable if you expect to work at a location for more than 24 months.
This rule applies from the moment you expect to exceed 24 months.
Example 1: Short Contract
- You sign an 18-month contract and commute to your client’s office.
- Your travel costs are allowable for the full contract length.
Example 2: Long Contract
- You sign a 36-month contract and commute to your client’s office.
- No travel costs are allowable because you expect to work there for more than 24 months from the start.
Example 3: Contract Extension
- You sign an 18 month contract (travel is allowable).
- When it ends, you extend for another 12 months.
- As soon as you expect to be there beyond 24 months, none of the travel costs for the extended period are allowable.
The good news is, even if you work somewhere for more than 24 months, any additional travel, for example from the office to a client, is allowable.
How much can I claim for travel?
Mileage Rates:
- Car: 45p/mile (first 10,000 miles), 25p/mile thereafter
- Bicycle: 20p/mile
- Motorcycle: 24p/mile
Remember to keep an accurate record of your mileage to support your claim.
You only need to keep petrol receipts if you wish to reclaim VAT on the petrol (note you don’t need receipts if you’re on the flat rate scheme). You can read more about VAT in our beginner’s guide to VAT.
Public transport
You can claim the full amount for your journey, but make sure you keep your receipts to back up your claim.
Subsistence and Accommodation
Subsistence costs (food and drink to you and me) incurred while working away from home are allowable.
A flat rate of £5 per night (UK) and £10 per night (international) can be claimed without receipts.
General business costs
Computers
Laptops, computers and related equipment are allowable when they are predominantly used for your business. Although they will be used in your business over multiple years, they will be treated as capital in nature. This means the tax mechanics are slightly different, but we can help you with the technical details.
Mobile phone
- Business call costs are fully allowable.
- If a business landline or mobile has minor personal use, HMRC will more than likely accept your claim.
As director of a limited company, your company can pay for a mobile phone on your behalf, be aware that this must both paid for and in your company’s name. As a sole trader, you can claim a portion of the cost based on your business use.
Use of home as an office
You can claim a flat rate of £26/month, without evidence. There are other, more complicated ways, to claim for your home office. However, we usually recommend the flat rate scheme as HMRC allow this claim without complex calculations, evidence, or additional disclosures.
Subscriptions
Membership costs to trade bodies, or subscriptions to work-related publications are allowable.
Business insurance
Professional indemnity insurance and any other entirely business-related insurances are allowable. Whilst there are lots of insurance providers on the market, we think that QDOS is a strong option for the contractor market. Plus, Maslins’ clients receive a 10% discount on their rates.
Interest and other banking charges
Bank charges and interest
Business bank account fees and interest on business borrowing are allowable.
Penalties and interest charged
Costs like late submission penalties and interest on overdue tax payments are not allowed. HMRC does not grant tax relief on fines. Although any fines/interest are business costs that HMRC wants businesses to pay, they do not wish to encourage behaviour leading to penalties by rewarding the business with tax relief. The same logic applies to most penalties from other organisations (e.g. Companies House, parking fines) – they are also not tax deductible.
Childcare
The current system operates like gift aid (as long as you meet the criteria), if the childcare costs £1,000, you pay £800, and the childcare provider reclaims the balancing £200 cost from HMRC. If you are paying for childcare, the best people to discuss it with are the childcare provider firms. Be aware you may see some articles that mention “childcare voucher schemes”, these probably contain out of date information.
The fun stuff
Client entertainment
Client entertainment of any kind is not allowable. Although, you could argue that it is “wholly and exclusively” for business purposes, HMRC does not allow it.
Client gifts
There are strict rules around gifts to clients and are only allowable if:
– the total cost is less than £50 per client per year, and
– they are branded with your business name/logo. This is why you’ll often receive t-shirts, pens etc as gifts.
Staff entertaining
Unlike client entertaining, the cost of an annual staff party is allowable for corporation tax. As this benefit extends to people in your household, it means you can take your partner out! However, you must keep the cost below £150/head. If you go over this limit, the entire amount will be taxable personally.
Trivial benefits
These one-off gifts of up to £50 are a great way, tax-free way to reward yourself or your employees. The gifts must be no more than £50 and cannot be cash – think gift, voucher, wine, chocolates, flowers etc. Limited company directors are limited to six gifts up to £50 per year. Watch our video for more details.
Charity Donations
Charity Donations
In certain circumstances, HMRC allows these as business expenses for limited companies. From an admin perspective, it is usually simpler to donate via your limited company. For a donation to qualify for tax relief via your company, it must be:
- To an organisation officially registered as a charity
- To a charity registered and based in the UK
Donations to non-registered and/or foreign charities can often be paid for by the business, but they won’t attract any tax relief.
For sole traders, you will receive tax relief on gift aid donations providing you have a tax liability. Careful, if you don’t have a tax liability and claim gift aid, this can actually create an extra tax liability for you (mainly if your total income is covered by the personal allowance).
Eye Tests and Glasses
The cost of an eye test for a director or employee is allowable. Glasses can only be claimed if they are specifically for Visual Display Use (VDU). If there is a box on your prescription confirming VDU, then the company can cover the cost of the glasses and get tax relief.
Accountancy costs
Of course, we can’t forget these! The good news is that your accountant’s fees are allowable, giving you a tax-efficient way to get expert advice. If you need guidance on your expenses, our friendly team is here to help you maximise your tax efficiency. Talk to us.
