What are deductible expenses?
Limited company business owners are often great at providing their core services or products but less sure when it comes to dealing with business finances. One area that often gets overlooked is claiming all your deductible expenses on your tax return. Let’s consider what you can and cannot claim as allowable expenses in your business.
What are deductible expenses?
Deductible expenses, also known as allowable expenses for tax purposes, are expenses incurred by businesses that may be taken off when calculating taxable company profits. It’s vital to keep accurate records of all your business transactions including backup paperwork so your accountant can identify which items are deductible expenses for tax.
For an expense to be deductible, it must be ‘wholly and exclusively’ incurred for business purposes. This means if you buy a laptop for business, you can only claim the whole cost if you never use if for personal reasons. Some costs are hard to split between personal and business, such as a personal mobile phone contract that has unlimited calls and texts included as part of the plan. In cases like these, it’s often better to have a mobile phone contract in the business name that only gets used for business communications.
Common deductible expenses for limited companies
Most of the costs associated with running your limited company business are deductible for corporation tax. Make sure you are deducting the following expenses from your sales figures to arrive at your taxable profit:
| Expense category | Examples |
| Office supplies and equipment | Computers, printers, stationery |
| Rent and utilities | Rent, electricity, water, broadband |
| Salaries and other staff costs | Salary, bonuses, NI, pension payments |
| Professional fees | Legal, accounting and consultancy services |
| Travel and subsistence | Airline, train and other transport costs, meals and hotels while on business |
| Vehicle and mileage expenses | Company-owned vehicle costs such as fuel, servicing, MOT, insurance Mileage allowances for personal vehicle use |
| Marketing and advertising | Online advertising, print ads, promotional materials, networking, website development and maintenance |
| Training and development | Staff personal development and training programmes |
| Interest and finance charges | Bank charges, arrangement fees, interest on loans, credit card fees |
| Insurance | Public liability, professional indemnity, buildings/contents, key person, stakeholder insurance |
| Home office | Portion of utilities, insurance etc or flat rate |
| Memberships & subscriptions | Professional body/association membership fees |
| Trivial benefits | Small (up to £50) gifts for staff/directors |
| Annual party | Cost of providing an annual (summer/Xmas) party for staff members – up to £150 per person |
| Charitable donations | Cash, goods, second hand equipment, seconded staff |
What is the Cost of Goods Sold?
Cost of Goods Sold are the directly attributable cost of producing goods for sale. COGS includes:
- Direct Materials: The raw materials and components that are used directly in the production of goods.
- Direct Labor: The wages of employees who are directly involved in the manufacturing process.
- Manufacturing Overhead: Indirect costs that are closely tied to the production process, such as factory utilities and depreciation of equipment.
Cost of Goods Sold (COGS) is deducted from turnover to find gross profit. All these costs are tax deductible and must be included to minimise corporation tax.
Common mistakes limited company directors make with allowable expenses
- Failing to keep accurate records which leads to tax audits and investigations
- Claiming personal expenses as business expenses
- Overlooking allowable director expenses such as pension contributions and trivial benefits
- Incorrectly calculating mileage leading to disallowed deductions and tax penalties
- Ignoring the Annual Investment Allowance (AIA) resulting in delayed tax relief and higher tax bills.
- Misclassifying employees and subcontractors (e.g. getting IR35 rules wrong)
- Not claiming for business use of home
- Incorrectly claiming entertainment expenses
- Forgetting to deduct accountants, lawyers and consultants’ fees
- Failing to correctly reclaim VAT on business expenses or reclaiming VAT on non-eligible expenses
It can be challenging to keep on top of your business finances and make correct assessments about your deductible expenses for tax.
Ensure your deductible expenses are right every time
Unless you love bookkeeping and ensuring you’re up to date with changing tax legislation, you’re likely to require a business accountant who can thoroughly review your finances so you don’t miss out on claiming everything you are entitled to claim. The Adams Accountancy team keeps on top of your record keeping, ensuring you don’t pay a penny more tax than you need to. Call us on 01322 250 001 for a free chat about how we could make your business more tax efficient.
For more information, check out the pages about allowable expenses, HMRC provides online.
