Remember for HMRC to allow an expense it must meet this rule and fulfil each of the three criteria:-
‘wholly, exclusively and necessarily incurred in the performance of your duties’
You should retain receipts for min of 7 years as proof of purchase, these can be kept manually or scanned in and saved on PC.
Expenses that will probably be paid for by the company but then disallowed for Tax relief, such as:
- Business entertaining including the VAT; however input VAT on business entertaining of overseas customers is recoverable
- Charitable subscriptions and donations, except to small local charities
- Political donations
- Costs and Fines for breaking the law
- Loan Capital Repayments
- Drawings, including payments for tax and National Insurance contributions
- Depreciation; capital expenditure is subject to the capital allowance regime
- Expenditure on plant and machinery for most small businesses is likely to be covered by the annual investment allowance.
Travel & Subsistence
Determining whether travel and subsistence expenses are allowable is a complex area but generally you can claim expenses incurred for all legitimate business journeys including travel to a temporary workplace. This means you can claim the costs of travel from your home to your client site, so long as this site remains a temporary workplace*.
This is a considerable difference from employees in a permanent job, as travel to their place of work would be regarded by HMRC as ‘ordinary commuting’ and therefore not an allowable expense.
*A temporary workplace is defined as a workplace where you go to perform a task of limited duration or for a temporary purpose. It ceases to be a ‘temporary’ workplace if you attend it for a period of continuous work that lasts, or is likely to last, more than 24 months. This means as soon as you know that you will be at a workplace for more that 24 months then travel and subsistence cannot be claimed.
Examples of Travel & Subsistence Expenses
- Air, Train, bus, ferry and taxi fares
- Parking, congestion charges and tolls
- Subsistence expenses e.g. lunch at temporary workplace
- Hotel and meals, if you need to stay away from home
- HMRC guidance on how much per night for incidental expenses (PIE’s) for overnight stays in the UK can be found on https://www.gov.uk/expenses-and-benefits-travelGuide
- Mileage using your own vehicle (see below)
The above examples should be allowable expenses provided they are for business journeys or for travel to a temporary workplace. NB: PIE’s do not require receipts.
If you use your own vehicle for business travel you can claim set rates. https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances
Please Note: Total business mileage relates to each individual tax year and includes mileage claimed in previous employments in that tax year.
You should receive a mileage form that shows: date of travel / to and from mileage / who visiting / reason for visiting / total miles / signed by employee and fuel receipt attached (it won’t match the mileage but is proof fuel had to be purchased that period). Having a mileage form that calculates the mileage / total repayable and any VAT will save time too.
You have to decide it if is better to claim business mileage (45p per mile up to 10,000 miles, 25p thereafter *2020 rates), or a % of the costs of your car (fuel/mot/servicing). Because a % is open to interpretation it is better to claim just business mileage. And you can’t chop and change each year – once decision made you stick with that until you change vehicle.
Entertaining expenses are always disallowed in the company’s accounts as a deduction for Corporation Tax. The area’s most likely to raise an inquiry by HMRC into the company’s accounts are the Director’s travel and entertaining expenses as these have the most potential for abuse.
Expenses related to bona fide business entertaining may be claimed if the entertainment meets all of the following criteria: •For the Director where the distance is more than 5 miles from the place of work & not pre-booked. •Claims for staff entertainment are allowed up to £150 per year (staff only, not spouses) e.g. Christmas party.
The cost of entertaining staff or colleagues in the same organisation is not considered bona fide business entertaining e.g. your Company Secretary.
A full explanation of entertainment expenses should be documented and substantiated by original receipts. Write on the back of the receipt who it is you saw and why.
Telephones and Internet
- Home Telephones
You can claim the cost of the business calls only. You cannot claim the cost of rental as this will be treated as a benefit in kind on which you will pay tax. If you wish to claim rental then install a second line but make sure the account is in the company name and is paid for by the company.
- Mobile Telephones
If the account is in the company name and company pays the bill then there is no taxable benefit for a mobile phone. If the account is personal then you can claim the cost of business calls only.
If the account is in the company name and any private use is not significant then there is no taxable benefit for internet usage. If the account is personal then you may only claim a proportion of the bill based on your business usage.
Claims for subscriptions to professional bodies relevant to your employment are permitted. This is restricted to certain
professional bodies approved by HMRC.
Subscriptions where the activities of that professional body are not directly relevant to the employment are specifically disallowed.
General Office Purchases
The actual cost of office stationery, postage and computer consumables used wholly, exclusively and necessarily in the performance of your duties. Please retain receipts.
The cost of training courses, reference books & journal provided these relate to the duties of your employment.
Generally speaking, glasses cannot be claimed as an allowable business expense. HM Revenue & Customs rules state that they will only allow expenses that are deemed to be wholly and exclusively for the business and necessarily incurred in the performance of your duties. In the case of glasses, it is more than likely that they will also be used outside of your working environment; therefore the cost cannot be justified as an exclusive business expense.
However, if a prescription is required for glasses that are solely to be used for business purposes and evidence can be provided that they are not used elsewhere, then the purchase of glasses can be justified as an allowable business expense.
Donations made by the company are allowable, as long as it is not to a connected party and there you get nothing in return for the donation.
Use of Home as an Office
If you have an office in your home you can claim a modest amount that can be justified to HMRC.
For minor use, e.g. just filling in expense claims or raising monthly invoices, because you leave home each day to carry out your contract activities at a client site, the HMRC guidelines provide a small fixed amount per week. If the claim is greater than their allowance per week then this could trigger an investigation by HMRC so unless your costs are significant it is probably sensible not to make any claim.
If your costs are significant, you must actually work from home on revenue generating activities. The office you use must be a business office and not just a bedroom or a kitchen table. It must be available to be inspected by HMRC who may ask to hold a meeting in the office. The cost should represent the cost of you providing an office at home i.e. a proportion of heating, lighting etc plus a proportion of council tax and other direct property costs. For example: In a 7 room house you could charge 1/7 of your costs.
However, if this is a large sum you could find that your office is excluded from your principal private dwelling allowance. This would mean when you come to sell your house, that proportion, in this case 1/7, of the property is subject to Capital Gains Tax.
If you leave your home to carry out your contract activities at a client site, then it is unlikely you can make a claim and in many cases, it is probably sensible not to make any claim.
The cost of equipment purchased to carry out the duties of your employment. This would include computers, printers, software, other peripherals plus the costs of equipping an office e.g. desks, chairs, filing and bookcases. When making these purchases you can pay personally but must obtain an invoice in the company name.
Expense items that cannot be claimed include the following:
- Office Clothing such as business suits (except safety clothing)
- Car service and repairs
- Training Courses not related to your employment
- Private club subscriptions – e.g. Golf Club membership
- Items mainly for personal use – e.g. televisions, cameras, Hi Fi
Please remember business expenses should only relate directly to your business. Personal expenses that do not wholly relate to the business of your company should not be claimed.
Directors of Limited Companies
In the words of Inland Revenue, if you are a small service company (i.e. director and sole employee), to claim anything you have to carry out substantive duties of employment from your home and not have the opportunity to do these at your client’s site; if you could work at a client’s site and choose to work from home, this does not count in your favour.
You could claim that you need to have a base for your company and you cannot do the paperwork from your client’s office, but this has been tried before in court and has been found in favour of the tax man. The Inland Revenue has a page dedicated to this and some examples to see if you fall inside or outside of this rule
If you do carry out substantive duties of employment from home you can claim expenses for your variable costs, i.e. the additional costs of: •gas/electricity. •metered water costs (not if you have a fixed charge for water rates). •business phone calls (including dial-up internet access). You need to provide itemised proof for your phone calls.
You can claim a fixed allowance for these (excluding business phone calls) without having to provide proof to back up your claim.
You are not eligible to claim expenses for any of the fixed costs of running your home: •council tax •rent •water rates (fixed water rates rather than a water meter) •mortgage interest •insurance
If you have a new website created that is a ‘shop’ so people can actually buy it’s a balance sheet item and not an expense allowable against tax. If it is a ‘information’ website you can as its classed as advertising.
Do not get confused between what you can claim as a limited company director and what you can claim if you are self-employed.
Source: HMRC / MJB Avanti