It’s important that you do not get confused between what you can claim as a limited company, what you can claim if you are self-employed, and what can be claimed for VAT and Tax. This factsheet will help clarify what expenses you are allowed to be claim tax relief for, and which ones you are not!
HMRC will only allow expenses that it classes as legitimate business expenses that are:
‘wholly, exclusively and necessarily incurred in the performance of your duties’
Any expenses that do not meet this rule and do not fulfil each of the three criteria of wholly, exclusively, and necessarily, will be disallowed:
It is essential to obtain and retain receipts for all expenses incurred in order to be able to justify the expense if questioned by HMRC.
So what is an allowable expense?
The answer to this much asked question is essentially: “Anything that relates to your Company”
There are some expenses which, although genuine business expenses, are specifically excluded from tax relief, including:
Business entertainment: In most cases, the cost of entertaining clients is not tax-deductible and VAT is not recoverable on expenditure. However input VAT on business entertaining of overseas customers is recoverable
Charitable subscriptions and donations, except to small local charities
Costs and fines for breaking the law
Loan Capital Repayments
Depreciation: Capital expenditure is subject to the capital allowance regime
Expenditure on plant and machinery: For most small businesses this is likely to be covered by the annual investment allowance of up to £500,000 until 31 December 2015.
Travel & Subsistence
Determining whether travel and subsistence expenses are allowable is a complex area,
but generally you can claim expenses incurred for all legitimate business journeys including travel to a temporary workplace. This means that you can claim the costs of travel from your home to your client site, so long as this site remains a temporary workplace*.
This is a considerable difference from employees in a permanent job, as travel to their place of work would be regarded by HMRC as ‘ordinary commuting’ and not an allowable expense.
*A temporary workplace is defined as a workplace where you go to perform a task of limited duration or for a temporary purpose. It ceases to be a ‘temporary’ workplace if you attend it for a period of continuous work that lasts, or is likely to last, more than 24 months. This means that as soon as you know you will be at a workplace for more that 24 months, then travel and subsistence cannot be claimed.
Examples of Travel & Subsistence Expenses
Air, train, bus, ferry and taxi fares
Parking, congestion charges and tolls
Subsistence expenses e.g. lunch at temporary workplace
Hotel and meals, if you need to stay away from home
Guide of £5 per night Personal Incidental Expenses (PIE’s) for overnight stays in the UK
Guide of £10 per night personal incidental expenses (PIE’s) for overnight stays overseas
Mileage using your own vehicle (see below)
The above examples should be allowable expenses provided they are for business journeys or for travel to a temporary workplace. NB: PIE’s do not require receipts.
Business Mileage If you use your own vehicle for business travel you can claim the rates set out in the table below:
Vehicle Type Rate Per Mile (On first 10K miles in tax year) Rate Per Mile (On each mile over 10K)
Cars / Vans 45p 25p
Motorbikes 24p 24p
Cycle 20p 20p
Please Note: Total business mileage relates to each individual tax year and includes mileage claimed in previous employments in that tax year.
Entertaining expenses are always disallowed in the company’s accounts as a deduction for Corporation Tax. The areas most likely to raise an inquiry by HMRC into the company’s
accounts are the Director’s travel and entertaining expenses, as these have the most potential for abuse.
Expenses related to bona fide business entertaining may be claimed if the entertainment meets all of the following criteria:
For the Director where the distance is more than 5 miles from place of work & not pre-booked (as covered under subsistence rules).
Claims for staff entertainment up to £150 per year (staff only, no spouses) e.g. Christmas party.
A full explanation of entertainment expenses should be documented and substantiated by original receipts. TIP: Write on the back of the receipt who it is you saw and why.
Telephones and Internet
You can claim the cost of the business calls only. You cannot claim the cost of rental as this will be treated as a benefit in kind on which you will pay tax. If you wish to claim rental, install a second line and ensure the account is in the company name and paid for by the company.
If the account is in the company name and the company pays the bill then it is an allowable expense and exempt from P11d Benefits in Kind. If the account is personal then you can claim the cost of the business calls only.
Internet If the account is in the company name and any private use is not significant then it is an allowable expense and exempt from P11d Benefits in Kind for internet usage. If the account is personal then you may only claim a proportion of the bill based on your business usage.
Claims for subscriptions to professional bodies relevant to your employment are permitted.
This is restricted to certain professional bodies approved by HMRC. Subscriptions where the activities of that professional body are not directly relevant to the employment are specifically disallowed.
General Office Purchases
The actual cost of office stationery, postage and computer consumables used wholly, exclusively and necessarily in the performance of your duties. Please retain receipts.
The cost of training courses, reference books & journals – provided these relate to the duties of your employment.
Generally speaking, glasses cannot be claimed as an allowable business expense. HMRC rules state that they will only allow expenses that are deemed to be wholly and exclusively for the business and necessarily incurred in the performance of your duties. In the case of glasses, it is more than likely that they will also be used outside of your working environment; therefore the cost cannot be justified as an exclusive business expense.
However, if a prescription is required for glasses that are solely to be used for business purposes and evidence can be provided that they are not used elsewhere, then the purchase of glasses can be justified.
Donations made by the company are allowable, as long as it is not to a connected party and you get nothing in return for the donation.
Use of Home as an Office
If you have an office in your home you can claim a modest amount that can be justified to HMRC. The amount you can claim will be determined by your circumstances and the extent to which you use your home as an office.
Home used for simple tasks such as filling in expense claims or raising monthly invoices.
Due to the fact that you leave your home each day in order to carry out your contracted activities at a client site, the HMRC guidelines state that a claiming a figure of £2.00 per week is acceptable. If the claim is greater than £2 per week then this could trigger an investigation by HMRC, so unless your costs are significant it is probably sensible not to make any claim.
Use of home for revenue-generating activities.
If your costs are significant, you must actually work from home on revenue generating activities. The office you use must be a business office and not just a bedroom or a kitchen table. It must be available to be inspected by HMRC who may ask to hold a meeting in the office.
The cost should represent the cost of providing an office at home, i.e. a proportion of heating, lighting etc plus a proportion of
council tax and other direct property costs.
For example: in a 7 room house you could charge 1/7 of your costs.
However, if this is a large sum you could find that your office is excluded from your principal private dwelling allowance.
This would mean when you come to sell your house, that proportion, in this case 1/7, of the property is subject to Capital Gains Tax.
You can claim the cost of equipment purchased to carry out the duties of your employment.
This would include computers, printers, software, other peripherals, plus the costs of equipping an office e.g. desks, chairs, filing and bookcases.
Expense items that cannot be claimed by Directors of Limited Companies include the following:
Office clothing such as business suits (except safety / protective clothing)
Car service and repairs
Training courses not related to your employment – e.g. plumber claiming skiing instruction
Private club subscriptions – e.g. Golf Club membership
Items mainly for personal use – e.g. televisions, cameras, HiFi, Sat Nav
Please remember, business expenses should only relate directly to your business. Personal expenses that do not wholly relate to the business of your company should not be claimed.
Directors of Limited Companies
According to Inland Revenue, if you are a small service company (i.e. director and sole employee), in order to claim anything you have to carry out substantive duties of employment from your home and not have the opportunity to do these at your client’s site. If you could work at a client’s site and choose to work from home, this does not count in your favour.
You could claim that you need to have a base for your company and you cannot do the paperwork from your client’s office, HOWEVER this reasoning has been tried before in court and has been found in favour of the tax man! The Inland Revenue has a page dedicated to this and some examples to help you see if you fall inside or outside of this rule.
If you do carry out substantive duties of employment from home you can claim expenses for your varia-ble costs, i.e. the additional costs of:
metered water costs (not if you have a fixed charge for water rates)
business phone calls (including dial-up internet access). You need to provide itemised proof for your phone calls.
You can claim up to £2/week for these (excluding business phone calls) without having to provide proof to back up your claim.
You are not eligible to claim expenses for any of the fixed costs of running your home:
fixed water rates