Understanding the allowable expenses for a limited company that you can report can allow you to reduce your company tax bill. You will deduct allowable business costs from your income to measure the benefit of your firm and thus the amount of corporate tax that you need to pay. So, to make your life easier, here is a comprehensive guide on what are allowable expenses for a limited company. So, let’s get started:
WHAT IS A LIMITED COMPANY?
A limited company (LC) is a generalized case of an organization that restricts the amount of liability of the shareholders of the organisation. It relates to a regulatory mechanism which ensures that the responsibility of the members of the company or the customers is restricted to their involvement in the company by way of contribution or engagement. A limited company is an entity in a legal context. The naming convention for this sort of business arrangement is generally found in the United Kingdom, where the name of the company is preceded by the abbreviated “Ltd.” In the United States, limited corporations come in various types, like limited liability companies (LLC).
As stated, the properties and debts of the corporation are different from those of the owners of a limited company. As a consequence, should the corporation suffer financial difficulties as a result of regular corporate practises, the personal properties of the owners will not be at risk of being taken by the creditors. Possession of a limited company can quickly be changed, and many of these businesses have passed on over generations. Unlike a public corporation in which anybody may purchase shares, involvement in a limited company is regulated by company rules and regulation.
A limited company can be “limited by shares” or “limited by warranty.” If limited by shares, the business is owned by one or more owners and controlled by at least one chairman. In the case of a limited warranty contract a company is owned by one or more sureties and controlled by at least one owner.
The main advantage of a limited company is the division of properties and profits from the business and shareholders and partners by limited liability. This implies that if a corporation goes bankrupt, shareholders will only risk as much as their initial investment and no more; creditors or other lenders cannot demand personal properties or profits from their owners.
WHAT ARE ALLOWABLE EXPENSES?
Allowable expenses are necessary costs to keep the company going smoothly. They’re tax-free, which ensures you don’t incur taxes on the money you’ve spent. If, for instance, you made 30,000 pounds last year but incurred 5,000 pounds on qualifying expenditures, you will only be assessed at 25,000 pounds. That being said, only those items can be put at a discount. Therefore, to ensure that you do not become an unintended tax evasion target for HMRC, it is important to consider what is allowed and what is not allowed.
The ultimate objective to be taken into account when claiming business expenses is that you can only reimburse expenses that have been accrued “entirely and solely” when operating your limited company. Besides, you cannot recover costs that have a secondary function, as is the case with corporate and private spending where the company proportion cannot be calculated. For instance, apparel (except for protective wear).
Once you understand permitted allowable expenses for a limited company, it is essential to retain all your receipts, invoices, financial records and bank statements in the event of an audit by HMRC, where you may have to show that your statements are justified on the grounds of valid business expenses. Not keeping correct records is one of the greatest accounting errors you can produce since this is an obligatory task for any business.
ALLOWABLE EXPENSES A LIMITED COMPANY CAN CLAIM:
- MEDICAL AND EYE TEST EXPENSES:
If the workers use computer screens as a large part of their jobs, they should conduct eye testing as well as medical checks as a limited company cost. The cost of medical glasses or contact lenses can also be reported as business expenses, but only if they are used exclusively for screen-based work as part of their jobs.
- COMPANY INSURANCE EXPENSES:
You may demand the value of the business insurance premiums as small company costs, as long as they are used solely for business reasons. Company insurance, comprising public liability insurance, contractor liability, technical indemnity insurance and material insurance, are all qualifying charges.
- MARKETING, PUBLIC RELATION AND ADVERTISING COSTS:
You work tirelessly to announce your company’s goods and services through your advertisement, marketing and PR practices. And regardless of whether it is a one-off payment or a continuing charge, whether the transaction has been used purely for commercial purposes, it may be claimed as one of the limited company expenses.
- ACCOMMODATION AND BANKING EXPENSES:
If you’re on a trip abroad and have to be away from home overnight, you can bill for the cost of your hotel. You may also assert the expense of food and drink as travel and survival expenses. Bank payments paid to the business accounts, comprising credit or debit card and interest payments, can be reported as business expenses.
- HOME EXPENSES IF YOUR COMPANY OPERATES AT YOUR HOUSE:
If your residence is the centre of your business, you should report a portion of your housing costs and utility bills as business expenses. This expense may be stated at a rate of £4 per week or by finding out what spaces you need for your business requirements and the length of time they are used for work-related purposes. You may also declare the costs of electricity, ventilation, shipping and printing and accounting and legal services as allowable expenses for a limited business – as long as they are used exclusively for commercial purposes.
- PRESENTS, ENTERTAINMENT OR TRIVIAL EXPENSES:
You may not need to pay tax and national insurance or let HMRC learn about a donation or profit to your worker (otherwise regarded as a negligible benefit) if the below law applies:
- It is not laid out in the terms of the agreement.
- It’s not a compliment for their success or results.
- It’s not a cash or debit coupon.
- It’s costing you £50 or less to deliver
If you give gifts or bonuses to workers who do not follow any of the aforementioned conditions, you will have to pay tax on them.
- WORKING SUBSCRIPTION CHARGES:
Occupation-specific newsletter subscriptions, articles and books can be listed as a limited company cost. E.g., if you are the producer of a photography publication and have a membership to a competing title, you must be able to deduct the expense of this as a taxable benefit, as it is a platform for companies to stay up to date with market trends and competitiveness.
- PHONE BILLS AND EQUIPMENT CHARGES:
Communication services, including telephone and internet service, can be listed as a limited company expense. If your cell phone plan is in the company’s name and is used exclusively for commercial reasons, you will report the whole bill as a taxable benefit. If it’s a personal arrangement, you’ll need to differentiate business and personal use and demand business-related expenditures only. You will also claim limited company costs for the corporate connections you created from your home telephone line.
From computer systems and programs to sensors and printers, the equipment needed to help you perform your position as limited company manager can be listed as business expenses. Business equipment, such as chairs and desks, can also be used for as long as it is used exclusively for commercial purposes.
- TRAVEL EXPENSES:
Flight costs can be claimed as limited company expenditures if:
- You are liable to pay the cost of transport
- Travel is required for business purposes and you will need to be available at the location in consideration for business purposes. (This does not require a daily trip between your residence and a regular workplace.)
If you use your vehicle or van to drive to a temporary place of employment and you have charged the petrol out of your wallet, you can report the following prices as restricted company expenses:
- Cars and vans – 45p a mile for the first 10,000 miles and then 25p per mile afterwards.
- Motorcyclists – 24p a mile.
- Bicycle – 20p a mile
Claiming the aforementioned rates would not only lower your gross corporate tax bill but also ensures that you can make a refund of the amount reported. As well as the mileage prices set out above, you can also claim the following as company expenses:
- Price of parking
- Road toll charges
- Rates for Congestion
- Hotel Suite (within reason)
- Meals and drinks on an overnight business trip
- Public transit, including rail, road, air and taxi fares
- Insurance of car
- Vehicle maintenance and operation
The above-mentioned or any other travel charges which spent only for business purposes can be claimed as allowable expenses for limited business.
- START-UP COSTS:
Start-up costs can be reported as limited business expenditures up to seven years before the company begins trading. Popular pre-training company expenses include computing devices and software, internet and domain name payments, travel expenses, as well as specialized resources such as accounting and legal assistance.
- SALARY AND PENSIONS:
As a representative of a limited corporation, whether you want to pay yourself a fee as an employee of your firm, this and the associated National Insurance Contributions (NIC) can be counted as allowable expenses for limited business. Take into consideration that once you hit the national insurance threshold, you will have to start paying NICs.
Allowable expenses for a limited company are a very important aspect of any business. Nobody wants to pay extra tax than they have to spend, which is why making your company as tax effective as possible will help save you a bit of money. Note, when it comes to finding out what costs you may report for your limited company, the guiding principle is that they must be paid completely, solely and are appropriate for the functioning of your firm.