Table of Contents
Typical Company Business Expenses
The tax legislation enables certain expenses to be claimed as a deduction against business income, thereby reducing the income tax or corporation tax liability. To be a business expense it must be incurred wholly and exclusively for the purpose of the business.
The rules are stricter for employee expenses; they must be incurred wholly; exclusively and necessarily, for the performance of duties. The list of expenses is long and the rules are not always straight forward.
Here are some of the most common types of expenses you may encounter which are generally allowable, when you follow the rules:
Fees from the first advice given before you start. There are exceptions including certain tax fees arising from an HMRC enquiry. Directors should note that fees relating to the completion of their self-assessment income tax return is not an allowed expense and should be paid separately or it is liable to a benefit in kind charge, if it is paid by the company.
Including hotel and rental costs whilst staying away from home, for the performance of duties. Accommodation associated with a temporary workplace may be claimed, provided the length of the contract isn’t going to exceed 24 months.
Where it is not a capital investment.
You should note that if you recharge the expense to your client, even though air fares do not incur VAT, if you are registered for VAT you must charge VAT.
Annual Investment Allowance
You can get tax relief on expenditure on plant and machinery.
Where unpaid for 6 months and not a general provision. The VAT charged on the bad debt, where you are not on cash accounting, may be reclaimed provided all reasonable steps have been taken to recover the debt.
Charges such as those on an unauthorised overdraft are not allowable. This includes reimbursing charges to an employee. There may be a benefit in kind to the employee.
Deduction may be claimed under HMRC approved mileage allowance payments at 20p per mile; under the HMRC Cycle to Work Scheme; or through capital allowances where the business buys the bicycle.
Books and magazines
Where the book or magazine is relevant to the business then the expense is allowable. If there is an element of self interest then it is not an allowable expense and would be classed as a benefit in kind.
Where the contract is between the broadband supplier and the company. Where there is not a contract between the supplier and the company, there will be a benefit in kind charge on the full amount of expense claimed.
If there is an existing personal connection and the employee is required to work from home then the expense is not an additional cost and is therefore not allowable. If the employee is required to work from home and there is an additional cost, say to install or upgrade, then that cost and the monthly fees are allowable.
Business Gifts (corporate)
Where a gift is made that has a business element, for example a mug with an advert on then it is an allowable expense. Where a general gift is made with no specific advertising element, then it is treated in the same way as entertainment. Gifts of alcohol, tobacco and food are not tax deductible. Output VAT is not chargeable on business gifts provided the cost of the gifts does not exceed £50 per person in any 12 month period. Input VAT may be claimed.
Business Start Up
The cost associated with incorporating the company and setting up of the VAT and PAYE registrations are allowable. The formation fee is a capital cost and cannot be claimed.
Is claimed on assets and can attract 100% relief, high CO2 cars being the notable exception.
Provided they are to a registered charity and do not put the business into a loss making position.
Employees can claim up to £55 per week without incurring tax and NICs and it is not reportable to HMRC. Employee savings can be up to £933 a year better off and employer’s up to £400. A new scheme was introduced in 2015 when you can decide whether to join the new scheme or continue with the old.
A gift of up to £50 per year may be made, provided it is not food, alcohol or tobacco. A gift over £50 is taxable on the employee. There needs to be a minimum of two employees for this relief to apply.
Only tax deductible where the clothing is a specific uniform with either business branding or required for health and safety reasons.
Tax relief via Capital allowances may be claimed.
There is no benefit in kind charge on the employee where they are required to use a monitor in the performance of their duties. This is also the case for glasses etc. if there is a new prescription required solely for use whilst using the computer.
Hire and Rental
If the hire of equipment is purely for the business then it is an allowable expense. An example would be the hire of a photocopier.
Home Working Expenses (Use of home as office)
A round sum allowance of £6 per week may be claimed as an expenses from 6 April 2020 (£4 per week before 6 April 2020). This is considered adequate to cover the additional costs of working from home and does not require supporting paperwork.
Where the director works from home on a more permanent basis then the amount of additional costs incurred may be claimed and we have a simple spreadsheet to help you with this.
Incidental Overnight Expenses
Where an employee is working away from home, a fixed sum of £5 per night (£10 for working overseas) may be claimed to cover incidental costs such as telephone calls, newspaper or laundry.
A business that has employees other than its director/shareholder is legally obliged to carry Employer’s Liability. Professional Indemnity must be in place if specified in a contract by your client.
Other insurances include Public Liability, Tax Investigation, Office Contents, Jury Service, and Motor for business vehicles owned by the company, also Key Man. All may be claimed. Other insurances may be claimed but may attract a benefit in kind charge ie Executive Income Protection and Health.
Key Man Life Insurance
Key Man Life insurance is a policy befitting the business in the event of a sudden loss of the key executive in the business. It is to cover the cost of employing another key person or to implement strategies to save the business. The cost is allowable against business tax and as the policy belongs to the business there is no benefit in kind charge to the key person.
Legal costs for business purposes are allowable providing they are not costs incurred for fraud, fines, illegal actions or related to capital items.
Marketing is an allowable expense. The cost of developing a website should be treated as an intangible asset and capitalised on the balance sheet with amortisation charged. We would normally capitalise website costs where the website performs a function for the business, for example, customers are able to buy items from you directly through the website.
Annual medical check-ups provided to an employee are allowable against business tax and do not incur a benefit in kind charge. Medical insurance that is paid for by the employer is claimable but a benefit in kind charge applies. Where the employee is working abroad, the cost of the insurance to cover treatment is allowable and no benefit in kind charge is applicable.
Medical treatment is allowable and a benefit in kind charge would not apply whereby the employee incurred the treatment directly associated to injuries or diseases related to work, and is paid directly to the supplier by the employer. Treatment provided whilst working abroad is allowable and no benefit in kind charge applies.
Mobile phones provided to employees are allowable against business tax. Providing the device is solely for the employee’s use (not family) then there is no benefit in kind charge. A phone in the name of the employee cannot be wholly claimed by the business, only the cost of the business calls where separately identified. Business calls made as part of a personal, unlimited minutes bundle, and claimed, will be subject to a benefit in kind charge.
National Insurance Contributions
Employee NICs are paid by the employee from gross salary. Employer’s NICs are paid by the employer on top of the gross salary and are tax deductible, as are class 1a NICs paid on benefits in kind. There is an initial Employers allowance which can be claimed after you take on your first employee.
Office/ Christmas Parties
Office parties are an allowable expense, providing that the event is open to all employees; and the value per attendee does not exceed £150 and they are annual events.
Office and virtual office rental is allowable. Where business rates are charged, these are also tax deductible.
Costs associated with a Patent, whether granted or not are generally allowable.
Postage is allowable. Royal mail is exempt from VAT but companies using a private company may be charged VAT that may be reclaimed.
Printing is an allowable expense.
Salaries and Wages
Salaries or wages and the employer’s national insurance contributions are an allowable expense, provided reasonable.
Businesses may offer scholarships to employees. These scholarships are exempt from income tax and national insurance provided certain conditions are met, for example the course must be full-time; the grant must not exceed
£15,480 per annum excluding course fees. The cost may not be allowed as a business expense and the recipient should not be a member of the director/shareholders family.
Software with a life expectancy below 2 years is an allowable business expense. Where the expectancy is above 2 years, it is capital expenditure and should be reflected on the balance sheet as an asset and depreciation charged and capital allowances claimed.
Is an allowable expense.
Subscriptions to Professional Bodies
Certain professional fees may be deducted for business tax, and HMRC provides a list. The fees must be relevant to employee’s the business duties.
A landline telephone that is billed to the business is allowable. Where a home landline is used for business use then the call costs may be claimed.
Training costs to update or enhance an existing skill are allowable. Training for new skills that are not relevant to the services the business currently supplies are not, as they cannot usually be shown as being incurred in the performance of their duties. They are a capital cost.
Travel expenses for business purposes are an allowable expense. These may include air fare, taxi, tube, rail, car mileage. First class or lavish travel may be disallowed if it can be shown to be a reward rather than a necessary business expense. Travel between home and a permanent work place is not allowable.
Some benefits given to an employee are classed as trivial by HMRC.
The criteria for what is trivial is quite strict and all conditions must be met to 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
Where all the criteria above are met you don’t need to pay tax or National Insurance on the expense and they are not reportable to HMRC as benefits in kind. An example of a trivial benefit would be giving each of your employees a £25 non-cash gift voucher as a Christmas present.
Please note, if the cost of the benefit is over £50, the whole amount becomes taxable, not just the excess over £50. Directors cannot spend more than £300 per annum on themselves on trivial benefits.
Tax Efficient Benefits and Expenses
The tax legislation provides exemption from tax for a number of benefits and expenses.
Making use of available exemptions is a fundamental part of any tax-efficient remuneration strategy and the same considerations apply in the context of a family company.
In the main, the tax exemptions are mirrored for National Insurance purposes.
The list of benefits and expenses that can be provided to a director or employee without triggering a tax or National Insurance charge includes:
- Approved mileage allowance payments and passenger payments, you may also claim
- Incidental overnight expenses [£5 per night in UK, £10 per night abroad].
- Travel expenses from home, if that is the locus in quo of the
- Use of your home as an
- Travel expenses to and from a temporary workplace for up to 24
- Food and drink consumed en route or at a place where he travels to work, provided the work is itinerate or travel
- Works transport
- Subsidised public bus
- Employer provided cycles and cyclists’ safety
- Low or zero emission cars for self and
- Christmas parties and other annual functions [to a maximum of £150 per head].
- Employer-contracted childcare – to maximum of £55 per
- Removal expenses and benefits [to a maximum of £8,000].
- Trivial gifts that are not service
- Contributions to a registered pension
- Mobile phones – one phone per employee may be provided tax-free.
- Suggestion scheme
- Long service
- Eye tests and corrective appliances, and Health screening and medical check-ups.
- Company loan not exceeding £10k in the year.
You should also consider employing your family members, particularly if they are over 18 years old, however for example the 19 year old will actually have to do some work to justify the salary.
It should be noted that the availability of the exemption is generally dependent on conditions being met. These often include the requirement that the benefit is made available to all employees. Within the context of a family company this is unlikely to be a problem.
Talk to a Limited Company Accounting Expert
If you need any help or advice for your limited company finances, please don’t hesitate to speak to us or arrange a meeting.