Information about the expenses you can claim as a director of your own LTD company
Whilst running your business, you are likely to incur a number of business-related expenses; the majority of which have the benefit of reducing your company’s corporation tax bill. These can either be paid for using a business bank account or personally.
💡 If using a suitable business account, this can be integrated into your accounting software so these transactions are automatically recorded. Items paid for personally have to be added manually. Once recorded in the software, you can reimburse yourself the full cost without any personal tax implications.
For expenditure to be then be allowable for corporation tax relief, it must be incurred ‘wholly and exclusively’ for business, ie it has to be incurred with the sole purpose of contributing to the business’s trade. This can mean some expenditure with a clear business purpose may not be allowable if there is also personal reason for making it too. This doesn’t restrict the company from all expenditure with a personal benefit (more on that later!). We always recommend discussing any expenditure you are unsure about with your client manager who can explain any tax implications to you before going ahead.
Once the expenditure has been incurred, you must keep all business-related receipts/invoices (specifically VAT invoices and VAT receipts if reclaiming the VAT) for six years after the end of the accounting period the expenditure relates to, or if an item is still in use after six years, whilst the item is still being used by the business. This is a legal requirement from HMRC who can request copies of any records in that time frame.
You either can keep physical records or upload PDF and JPG receipts to the accounting software online / mobile app. Once saved digitally there is no requirement to retain the physical receipt/invoice.
Examples of Allowable Expenditure:
The following list of allowable expenses are all typical examples of business expenditure that contractors may incur:
- Accountancy fees
- Advertising and promotion - e.g., website hosting and design, business cards
- Bank charges/fees
- Business insurance – e.g., professional indemnity, employers and public liability insurance. These can be included with your monthly service package so please reach out to your client manager if you would like to include this cover
- Computer software
- Equipment - e.g., laptop, mobile phone, server, tablet and insurance for these items
- Hotels/Accommodation – allowable if required to stay overnight for the purposes of work (24-month rule applies)
- Legal Expenses
- Life insurance – Some specific policies are allowable and do not incur and benefit in kind (relevant life cover, key person insurance).
- Mileage – If using a personal vehicle for work travel, the company can reimburse you up to an approved rate tax free (24-month rule applies). These rates are:
- Cars and vans - £0.45 per mile for the first 10,000 miles and £0.25 per mile thereafter
- Motorcycle - £0.24 per mile
- Bicycle - £0.20
- Optician costs – Eye tests and glasses if necessary for VDU use
- Pension contributions – Please note employer contributions count towards your annual allowance. If you are unsure how much can be paid into your pension without incurring a tax charge, we recommend reaching out to a pension advisor about this
- Printing, postage and stationery
- Protective clothing
- Working from home allowance - HMRC allow your company to pay you up to £6 a week tax-free if you regularly work from home to reimburse a portion of your household expenses
- Subcontractor costs
- Subsistence – any pre-packaged or prepared meals from an outlet (e.g., restaurant, supermarket) when travelling for work (24-month rule applies)
- Tools
- Training courses & materials – if likely to help generate future income and is in line with the company’s existing trade
- Trivial benefits – One-off gifts to employees (but not as a reward for performance). These must be less than £50 per gift and not cash or a cash voucher (gift cards not exchangeable for cash are allowed). Directors are limited to £300 of trivial benefits each tax year
- £150 annual event allowance – You can spend up to £150 per head on an annual event (e.g., Christmas party) for employees. Employees can bring a plus one and the £150 allowance is for each tax year
❔The list above is not exhaustive and so you may find that you have incurred expenditure that isn’t included here. If you are unsure whether an item satisfies the wholly and exclusively rule, please raise with your client manager who will be happy to help.
24 Month Rule:
The 24-month rule determines whether a workplace is classed as temporary, and therefore whether you can claim travel and subsistence costs associated with travelling to and working at that location.
A work place is defined as temporary if you travel to the location rarely, not following a routine and with each visit being for a specific, standalone purpose. If you do routinely or often work in the same location, the workplace can still be considered temporary unless you spend over 40% of you working hours at the location and:
- You have worked at the same location continuously for a period of 24 months or,
- You become aware you will be working at the same location for 24 months or more (i.e., if a contract extension would take you over the 24-month threshold, the rule comes into effect from the moment the extension is signed) or,
- You intend to work at a location for more than 24 months
Expenditure with a personal benefit:
Whilst expenditure has to be made solely for trade purposes, this doesn’t exclude all expenditure that comes with a personal benefit. This personal benefit is usually deemed to be an employment benefit and is subject to income tax and employers’ national insurance.
Examples of expenditure that can result in a benefit-in-kind include:
- Assets used personally in addition to their business use (e.g., TV, speakers)
- Company car kept at or near your private residence when not in use
- Health insurance
Whilst this expenditure can still be allowable for corporation tax relief, it is not always tax efficient to put it through the company, as the benefit is taxed at income tax rates (20%, 40%, 45%) rather than the dividend tax rates (8.75%, 33.75%, 39.35%) if you were to instead draw the funds from the company and pay personally.
Benefits-in-kind also create additional filing obligations with HMRC and could make it more difficult to justify expenditure as wholly and exclusively for business should HMRC review your records.
There are however examples of expenditure with a personal benefit that are granted exemptions and are therefore not always taxable benefits:
- Computer/laptop – Incidental private use is allowed as long as it is ‘not significant’ when compared to its business use
- Life insurance – Specific types of cover (e.g., relevant life policy, key person) do not result in an employment benefit.
- Pension contributions
- Work phone – One phone can be provided with incidental personal use allowed alongside its business use
🤔 If you are ever unsure whether expenditure will result in a taxable employment benefit, please contact your client who will make you aware of any tax implications.
Disallowable expenditure:
Expenditure not made ‘wholly and exclusively’ for the purposes of trade is known as 'disallowable expenditure'. This means despite being made by the company, it is not allowed as a deduction against its taxable profits, and therefore receives no tax relief.
Expenditure will often be disallowable due to a perceived personal element, and so we recommend against putting these types of expenses through your company to avoid having a taxable employment benefit whilst receiving no tax relief. However, there are some examples of expenditure the company can make which are relatively common, yet are disallowable for tax. This includes:
- Client entertaining
- Dividends paid to shareholders
- Statutory penalties
❗ It is not unusual to have some disallowable expenditure each period.
IR35 status and expenditure:
Please note, the above guidance is only relevant to assignments that are deemed outside of IR35 regulation. In the vast majority of cases, if a contract is deemed inside IR35 the above expenditure will not be allowable as a deduction either by the company or against your income tax.
In theory, you can deduct costs that are ‘wholly, exclusively and necessary’ for the employment role from your tax bill however in practice HMRC set a very high bar to qualify for relief. If you do look to claim any expenditure against an inside IR35 role, please raise with your client manager when they are preparing the relevant tax return.