Tax deductible expenses for limited companies
If you're running a limited company this article will provide details os some of the tax deductible expenses for limited companies. There are certain expenses that you can charge you company for and obtain a tax deduction.
If you use your own car for business you can charge the company for the business mileage you incur and the company can include this as a deduction in their accounts.
To make life easier, you can use fixed mileage rates to calculate your business travel costs rather than having to keep detailed records of all the expenditure incurred. Subject to certain limits (see below) your company/employer can pay you a mileage allowance tax free.
Unlike a sole trader or partner these are essentially the only motor running expenses you can claim, if you use your own vehicle for business travel
The rates are currently (June 2016) as follows:
Rate per mile
Cars & vans - up to 10,000 miles
Cars & vans - over 10,000 miles
The rates are supposed to cover your fixed and variable running costs, for example petrol, maintenance, road tax, insurance and depreciation on the cost of your vehicle. (Don’t blame us if the current rates are woefully insufficient!)
If the mileage allowance paid is above the approved rates you will be taxed on the excess.
During the 2016/17 tax year you travel 8,000 business miles and your employer pays you a mileage allowance of 50p per mile.
The position is as follows:-
Mileage allowance payments received £ 4,000 (8,000 x 50p per mile)
Mileage allowance approved amount £3,600 (8,000 x 45p per mile)
Surplus £ 400
You will be taxed on the excess of £400.
During the 2016/17 tax year you travel 5,000 business miles and your employer pays you a mileage allowance of 30p per mile.
The position is as follows:-
Mileage allowance payments received £ 1,500 (5,000 x 30p per mile)
Mileage allowance approved amount £2,250 (5,000 x 45p per mile)
Deficit £ 750
You will be able to claim a personal tax deduction of £750.
To see the up to date rates, click here.
Working from home
If you use your home as an office for your business then you can charge your company rent for this usage.
You can either charge your company £4 per week as a flat rate deduction or you can charge them based on the actual costs incurred.
To charge your company on the basis of the actual costs incurred you need to follow the method outlined as follows:
You need to work out your costs for the year (it's probably easiest to do this using the company's financial year as your basis) for running your home - these can include mortgage interest (not capital), rent, maintenance, utilities, cleaning etc.
You then need to work out how many rooms you have in total (excluding bathrooms and kitchens) and how many you use for business. Then work out what proportion of time you use those rooms for business (do not make any one room 100% business use as this could lead you to be liable to capital gains tax when you sell your home!). Then apply this percentage to your total costs.
As an example, assume you have 5 rooms and you use 1 of these for business 75% of the time - the calcuation is 1/5*80% = 15%. If your total costs are £9500 then you can charge your company £9500*15% = £1425 as rent.
You can of course charge your company more (or less) but whatever you charge should be reasonable in terms of local office space rental charges. And if you charge your company more than the cost calculated above, you will be taxed personally on the excess.
We also recommend setting up a licence agreement between you and the company for this rental agreement (and also a dividend minute and resolution agreeing the licence).
So what are other tax deductible expenses for limited companies?
The easiest way to get tax relief in your company for your mobile phone is to have the contract in the company's name. Then you can use the phone for both business and personal calls and all the expenditure is allowed as a deduction in the company's accounts - the company can also claim back the VAT if it is VAT registered (unless it is using the flat rate VAT scheme).
This also won't be considered to be a personal benefit in kind if you use a business phone for personal calls as long as there is some business use.
If your phone is in your personal name then you will only be able to charge the company for the cost of business calls - and this can be problematic if you have a call inclusive contract!
You can see more about how to claim for your mobile phone costs here.
As long as the broadband contract is in the company’s name then this will be an allowable expense for corporation tax and as along as any personal use is insignificant then there will be no personal benefit in kind.
If you travel for business, you'll be allowed a 'reasonable' amount of subsistence costs ie food and drink.
You can see more about what you can claim for hotels and subsistence here.
Travel & business mileage
What constitutes business travel for employees and directors is one of the most contentious areas in tax and one which HMRC regularly challenges. The rules are quite detailed and you can see more about these here.
Once you've worked what constitutes your business travel the company can then claim a deduction for the following:
- Motor expenses - the simplest way to do this is via AMAP allowances as shown above
- train fares
- bus fares
- congestion charges
And what about parking tickets? Well, directors can't charge the company for any parking tickets they incur - however unfair that may seem! Employees can charge the company but will then be taxed on the cost of the fines as a benefit in kind and the company will have to pay employer's NI on the cost. Due to a recent tax tribunal, the company will not be able to claim a deduction for tickets which were issued by local councils as they are deemed to be the result of an illegal act. Whether the company can claim for tickets issued on private land is still under debate.
If you incur costs on behalf of your company for entertaining clients or staff then you can charge these back to the company.
However when calculating corporation tax the company will not be allowed a deduction for any client entertaining and the tax deduction on staff entertaining is subject to certain rules.
Where you undertake training to keep your current skills updated, or because it is required to maintain membership of a professional body, then any such training can be paid for by the company.
However if you undertake training to acquire a new skill then this will not be allowable. HMRC's view (supported by case law) is that acquiring a new skill enables you carry out your trade, for example a doctor can't claim the cost of a degree course required to become a doctor although they can claim for 'continuing professional development'
Clothing and uniform
The company can claim uniform costs (and might be able to claim for clothing if it has the business logo on it) as well as any protective clothing required for your business.
However you can't claim for everyday clothing - even if you only buy a suit to wear to business meetings!
Training costs can be provided to an employee or director of a limited company and will be an allowable expense for corporation tax purposes, with no benefit in kind impact on the employee provided that the training concerned is a course or other activity designed to impart, instil, improve or reinforce any knowledge, skills or personal qualities which:
- are likely to prove useful to the employee when performing the duties of the employment; or
- will better qualify the employee to perform those duties.
If you're intending to spend a large amount on training, make sure you are able to demonstrate the value to the business of this training.
For more useful information, check out our Ebooks here.