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Contractors with a limited company can claim tax relief on business expenses if they are "wholly and exclusively" for business use. Mixed-use expenses can be apportioned, but entertaining expenses aren't allowed. Assets like buildings, cars, and machinery are not deductible, though they may qualify for Capital Allowances. As a director, you're considered an employee, not a sole trader.
Capital allowances and allowable expenses are deductions for businesses aiming to reduce their taxable profit. They do still however apply to different types of spending.
Capital allowances offer a way to gain tax relief on capital expenditure, enabling you to deduct from your pre-tax income. This can be over the course of a few years or immediate, depending on the type of asset. Commonly, capital expenditure covers long term business assets, for example; machinery, business use vehicles or equipment. The allowance is determined based on whether the assets are deemed ‘capital in nature’, meaning that the benefits are over years as opposed to just the first year.
HMRC says, allowable expenses are costs that are incurred wholly, exclusively and necessarily in the running of a business. These can then be deducted from revenue before calculating a companies taxable profit and therefore must be incurred by business operations.
For many contractors, by far the most regular expenses claimed are mileage and other travel costs. You can normally claim all travel expenses to and from your temporary place of work.
Significantly, you can only claim as long as you expect to work at that location for no more than two years. If you've been working on a contract for 20 months and it is then extended for another six, you stop being eligible to claim mileage expenses from the minute you find out you'll be spending more than 24 months in one place.
That said, if you spend less than 40 per cent of your typical working week in any one place, you can keep claiming travel costs for regardless of how long you stay there.
The amount you can claim for mileage is 45 pence per mile for the first 10,000 miles in a tax year and 25 pence per mile thereafter. This rate is an approved mileage rate set by HMRC, the rate covers all car related costs such as fuel, insurance, servicing etc. So your other car related costs cannot be claimed in addition to the mileage rate.
Your company can claim for premiums paid on policies covering public liability insurance, employer’s liability and professional indemnity.
If your company was to pay for your personal life insurance, although it may be allowable if it was part of your directors’ ‘remuneration package’ under your employment contract with the company, it would create a taxable benefit in kind for you.
If your company engages an accountant to prepare its annual accounts, to run its payroll, file its VAT Returns or provide business tax advice etc, the fees incurred are tax deductible.
Fees paid to complete your Self Assessment Tax Return cannot be claimed as they are not related to your company’s business.
Phone bills and internet connection fees can be claimed as a limited company expense providing that the contracts are in the company’s name.
If you have a phone under a personal contract you will need to identify and apportion the charges between business and private use. This is what was described earlier as being ‘dual purpose’ expenditure, but which can be split to identify what is for business purposes and claimed accordingly.
If you have employees working for the company, including yourself as a director, the company can claim a deduction from its profits for the cost of the salaries and employer’s National Insurance Contributions.
If you engage any family members as employees remember that their salaries should be at a commercial rate for the duties which they perform. If they are excessive for the work done, then they will be seen by HMRC as not being ‘for the purposes of the trade’ and will be disallowed.
If your limited company runs out of its own business property or serviced office, the cost of maintenance, rent or service charges can be claimed.
If you run your business from home, you can claim a percentage of the cost of using your home (the ‘dual use’ principle again) based on the utility bills, what rooms are used, and the time spent in them. However, many contractors find it easier to claim the HMRC approved rate of £6 per week as a company deduction.
Membership of professional associations and trade bodies is an important way in which individuals and businesses remain in touch with developments in their sector.
Your limited company can claim tax relief on the cost of paying its employees’ and directors’ professional subscriptions without the individuals incurring a benefit in kind tax charge.
Payments of fees for gym or golf club memberships would, however, not escape the benefits charge!
Once you have set up an arrangement with a pension provider your limited company can make payments into your pension pot and claim tax relief on the whole of the premiums paid.
There are annual limits on how much you can pay or have paid into a pension (currently £60,000 pa) so check with your financial adviser before doing so.
Professional development and training courses can be claimed as limited company expenses.
There are special rules which exempt the costs of such eligible training from creating a tax charge on the employee or director. These include the proviso that the training is designed to enhance, improve, or reinforce existing skills which are likely to help the individual develop and perform in their existing role.
Training for additional qualifications is unlikely to qualify but the circumstances of the claim may need to be examined to check for eligibility.
In all cases the training must be paid for by the company or reimbursed by the company to the employee or director.
Your company may be running an advertising campaign in a trade or sector magazine or incurring costs online, through social media etc. Providing the objective is to obtain business then the cost can be claimed as a tax deduction.
Website development and maintenance costs may also be allowable provided they meet the ‘wholly and exclusively’ test mentioned earlier.
Items purchased by your limited company like a laptop, printer, scanner etc can be claimed as revenue expenditure meaning that 100% of the cost can qualify for tax relief when it is incurred.
If your business rents a van, it is likely to be able to claim the costs of rental as a tax deduction. However, if it buys a van exclusively for business use, the cost may be eligible for a 100% deduction through the Annual Investment Allowance scheme. This is a form of Capital Allowance which applies also to plant and machinery used by a business.
If your company has business loans or charge cards on which interest is payable, those charges can be claimed as a tax deduction. Likewise, any bank charges or overdraft fees on a business account are allowable.
If your company provides, maintains, and replaces protective clothing and uniforms because it expects them to be worn for business activities, a tax deduction can be given for the costs incurred.
Beware that the costs of everyday clothing like business suits and casual wear don’t qualify!
Client entertainment: While business entertainment costs are not usually allowable expenses, you must understand the specifics of these costs.
Home offices: If you work from home as a sole trader you can claim some household expenses for the section of the house used for business. For a limited company these costs are assuming the costs exceed the regular household costs if they hadn’t been working.
Personal vehicles: If you use your own personal vehicle for business purposes then you can expense a portion of the costs based on the amount you use it for work.
Capital allowances - Long term assets.
Allowable expenses - day to day costs
Capital allowances – tax relief over the life of the asset
Allowable expenses – immediate tax relief in the year they were occurred
Once identifying the assets you must calculate the allowance based on the relevant rates and include this in your business’s tax return. It is essential to keep detailed records of these assets and when they were purchased.
When planning your yearly finances it’s important to try to consider capital allowances that could significantly reduce a company’s tax liability, therefore you should think about the timing of any large purchases and keep up to date with any incoming allowance rate changes.
Tracking and managing: In order to maximise your business expenses it’s important to keep a keen eye out and track to the best of your ability, some good strategies for tracking expenses include:
Software: Using software that integrates into your accounting means you can track expenses in real time and keeps a neat record of finances.
Employee education: If you have another employee working for you its essential they are also aware of what is an allowable and what is a capital expense. Guidelines should be in place on what to do with these expenses how to document them and where to report them.
Hiring a professional: An accountant experienced in managing finances ensuring all transactions are recorded and compliant can be extremely valuable and time saving
Filling receipts: Keeping all of your receipts in an organised manner means you can substantiate any expenses you may try to claim.
All of this is critical for ensuring your not only efficient with your taxes but that you are also compliant therefore safeguarding your business finances.
Take a look at our award winning accountancy service, or get in touch with our team to learn more.
