What expenses can a limited company write off against tax? HEATHER ROGERS explains

Business expenses: What are the dos and don'ts on what limited companies can claim against tax?

I recently wrote about self-employment and the expenses you could claim against tax.

Now I will cover the tax situation for limited companies  in a little more detail.

First, here are the basics. A private limited company is a legal entity which has legal 'personality'.

Its liability is limited to the amount invested when the shares are purchased by the shareholders. It is legally separate from its directors and shareholders.

The shareholders own the company and the directors are responsible for running it. It can have one shareholder only, and that shareholder can also be its sole director.

Limited companies have to be formed via Companies House and this can be carried out by either an accountant or a solicitor, or you can use a formation agent.

I would strongly advise taking professional advice from an accountant or a solicitor before you consider this form of business structure.

Limited companies have much stricter reporting rules than sole traders, and have to file accounts at both Companies House and HMRC.

Since the Economic Crime and Corporate Transparency Act received Royal Assent in October 2023, much stricter rules for company formation have come into force, as well as reporting requirements, and more information about the company will be public.

There are also new legal responsibilities placed on directors of companies.

However, unless a shareholder wants one, an audit is not required unless you meet two of the following criteria:

- Your turnover is in excess of 10.2million

- The balance sheet exceeds £5.1million

- You have more than 50 employees

If there is more than one shareholder, there should always be a shareholders' agreement in place, which covers what happens in disputes or exit arrangements. Directors should also consider insurance.

How is a limited company taxed?

A limited company pays corporation tax on its profits. The rate depends (currently!) on its profit level.

Companies which make a profit of £50,000 or less pay tax at 19 per cent, those with profit which exceeds £250,000 pay tax at 25 per cent, and there is a sliding scale for profits in between.

Companies do not pay capital gains on asset disposals, they pay corporation tax.

The date for payment is nine months and one day after the company's year end.

Accounts have to be filed at Companies House nine months after the year end, and at HMRC 12 months after the year end.

The year end is set at twelve months from the end of the month the company is formed, but it can be changed.

Many small limited companies are classed as micro-entities - turnover below £632,000, a balance sheet total of less than £316,000 and fewer than 10 employees.

What about personal tax for limited company directors?

A director is often a shareholder in small companies, and if they are the sole director they will probably be the sole shareholder too (and often chief cook and bottle washer).

They pay personal tax on their earnings. This can be by salary, paid through a payroll, as the company is ultimately the employer.

If they are a shareholder as well they can draw dividends, providing there are sufficient profits after tax to cover the dividend payment.

Dividends are taxed differently, at 8.75 per cent if you are a basic rate taxpayer, 33.75 per cent at the higher rate and 39.35 per cent at the top rate. No National Insurance is payable on them.

What expenses can a limited company claim?

There are two matters to consider.

- What the company can claim as allowable costs against its profits

- What you can claim back from the company for costs incurred in the performance of your duties

A sole trader, one who trades as a person, is the business. With a limited company, the business is the company and a separate legal entity.

Tax deductible costs must be incurred wholly for business purposes.

However, if the director incurs expenses in the course of his or her duties on behalf of the company, pays for them personally and reclaims them from the company, they must be incurred wholly, exclusively and necessarily in the course of their duties.

They can be reclaimed in such circumstances from the company directly, regardless of whether they would be tax deductible on the company, for example entertainment. See more on this topic below.

The director can claim the cost of entertaining a client from the company if incurred wholly, exclusively and necessarily, but the expense itself is not allowable for tax against the company's profits.

The company can broadly claim the following expenses against tax.

Renting an office or commercial unit: This covers rent, rates, gas, electricity, insurance, cleaning and security

If the business office is at a director's home, rather than renting separate business premises, a claim can be made for a proportion of costs incurred, such as gas and electricity, but keep your bills.

Instead, you can claim the working from home allowance of £6 per week on your personal tax return, which requires no working out or receipts, but may not cover your costs.

An important note on insurance is that if you use your own vehicle for the business, make sure you have business cover.

If you don't, you won't be covered if you have an accident and this could cause you to be prosecuted. See more on motor expenses below.

Printing, postage and stationery

Goods for resale (cost of sales)

Staff costs, including staff pensions: See more on pensions below.

Telephone and internet

Computing and software

Travelling and subsistence costs for directors and employees

Protective clothing and uniforms: Note that this does not cover ordinary clothing

Marketing, advertising, website and publicity costs

Subscriptions

Legal and accountancy fees: This means business costs only, not the fees associated with the directors' personal returns.

Bank charges and interest

Equipment purchased for the business: You may be able to claim capital allowances.

What about claiming entertainment expenses?

Entertainment is not allowable except in the following circumstances.

- It is staff entertainment, in which case the company can claim up to up to £150 per staff member (including their spouse) but if you spend more, it could become a taxable benefit on them.

- When entertainment is provided as part of a contractual agreement.

- Gifts of less than £50 per year given to customers or suppliers with the business name displayed on the gift.

How do directors and any employees in a limited company claim expenses?

Any expenses paid by the director and employees personally and reclaimed from the company which fail the wholly, exclusively and necessarily test will be a taxable benefit on them personally and reportable on their own tax return.

If a director or employee claims expenses from the company, or receives benefits - a car, medical insurance, or a loan at a beneficial interest rate, for example - then these would also be reportable by the company on a P11D due each year by 6 July after the end of the tax year.

The company will also usually have to pay National Insurance on the value of the benefit.

You can find more on reporting and paying expenses on the Gov.uk website.

It is a good idea to use an expense claim form, detailing what the costs were for each time you make a claim for costs incurred personally.

How do expenses rules for limited companies differ from those for sole traders?

There are pros and cons of being a limited company or a sole trader, and you may start as a sole trader and incorporate as the business grows, or if you take on a business partner.

Take advice from an accountant if you are starting in business to find the right structure for your circumstances.

The expenses sole traders can claim are covered in detail here, and below are some differences in what limited companies can claim.

Motor expenses: The sole trader can claim for the business a percentage use of his or her car costs - the cost of the vehicle and its running costs.

The director of a limited company has two choices.

- Claim the fixed mileage rate. This is tax deductible for the company and not taxable on the director.

The director can be paid more per mile by the company, but the additional payment over and above the HMRC rates would be a taxable benefit on the director.

- If the company provides a vehicle on which a tax deduction would be claimed, then the director will be taxed on the taxable benefit arising.

Pensions: Unlike a sole trader, whose personal pension contribution is not an expense as part of his or her business, a director can choose to have a pension contribution made through the limited company.

This includes lump sum payments. This is tax deductible on the company and not a taxable benefit.

Medical insurance: This, including annual check-ups, can be provided to directors and any employees. It is a taxable benefit on them.

Glasses: These can be claimed but only for computer screen work, not general normal use.

Charity donations: For an individual, these are included in a separate section of the tax return, but a company can also make donations directly to charity as an expense.

Directors' loans: I don't like these at all, I'll be honest, but they are commonplace.

I suggest you get advice from an accountant on this topic as it can get complicated, but here is broadly what you need to know.

Some companies run a director loan account for their directors who are also shareholders.

At the end of the company's financial year, the loan is either cleared in full or partially by a dividend.

The loan is taxed in these ways:

- If the loan is not subject to interest, or the interest is beneficial – in other words, the interest rate is not commercial - then a taxable benefit arises on the interest, which is reportable on the P11D and taxed on the recipient of the loan.

This applies to any loan outstanding at the end of the tax year.

- Any loan outstanding on the company's books at its own year end is subject to a tax charge and this is at 33.75 per cent of the loan balance and paid with the company's corporation tax.

If the loan is repaid, or cleared by a dividend, the company can claim back the tax charge paid on it.

- If the director is not a shareholder, then the loan when cleared would be taxed as a salary payment.

And finally – how will the election result affect tax?

The Conservatives have committed to not raising corporation tax in their manifesto, as well as to maintaining capital gains tax and certain reliefs, and keeping private residence relief on homes as well as tackling tax avoidance and evasion.

Labour have committed to capping corporation tax at 25 per cent but will act if 'tax changes in other countries pose a risk to UK competitiveness'.

They have stated that they will publish a business roadmap within six months of taking office.

They have also said they will increase registration and reporting requirements and strengthen HMRC's powers, as well as tacking avoidance.

Inheritance tax, capital gains tax and pension tax relief are not mentioned at all, so are, in theory, up for grabs.

However, it's worth remembering that manifestos are not legally binding, and as the late, great judge Lord Denning said: 'A manifesto issued by a political party - in order to get votes - is not to be taken as gospel...

'It may contain - and often does contain - promises or proposals that are quite unworkable.'

Ask Heather Rogers a tax question

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Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic - tax codes, inheritance tax, income tax, capital gains tax, and much more.

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