Here, contracting expert, James Leckie, takes a closer look at how are these particular expenses treated for tax purposes. James runs a number of industry news sites, including Contract Eye and Bytestart.
The basic rule for all expense claims remains constant:
If you run your own business, you should be aware that your company can offset the cost of any legitimate business costs against its Corporation Tax liability, but all costs must have been incurred solely by the business, without any personal benefit.
What is a ‘duality of purpose’?
This means – importantly – that you shouldn’t offset expenses if they have a ‘duality of purpose’ as far as HMRC is concerned.
When it comes to broadband expenses, for example, if you use your residential broadband service for your business as well as the household, there is a clear ‘duality of purpose’, and you would have incurred the cost of the broadband anyway, whether you used it for your business or not.
In other cases – reclaiming the cost of business telephone calls from your residential phone bill, for example – if you can split out the cost of individual calls, then these specific costs can be claimed back by your company.
If, on the other hand, your residential phone package includes unlimited daytime calls, you can’t easily apportion a fixed cost for any business usage.
So, what is the best way to account for telephony expenses if you’re a limited company owner?
Telephone, mobile, broadband costs – in the company name
The simplest way to avoid the duality of purpose issue is for any telephone or broadband contracts to be in your company’s name from the start.
As long as any personal use is ‘reasonable’, then you can claim all of the costs of these services against your Corporation Tax bill.
You may find that business tariffs are higher than personal ones, however, any additional cost in real terms is likely to be compensated for by the tax savings you will make – in terms of Corporation Tax and VAT.
Telephone, mobile, broadband costs – residential contracts
As we mentioned previously, you can only expense any business use of these services if you can accurately split out the business element.
Aside from specific calls, this is hard to do these days, as most contracts are all-inclusive.
If you do split out and claim for the cost of individual business calls, you can also reclaim the VAT element, but you cannot claim for a proportion of the line rental, as the costs of this element would have been incurred by you personally, anyway.
If you do decide, for whatever reason, to pay for the costs of any residential phone or broadband service via your company, then this will be treated as a ‘benefit in kind’ – and both you and your company will have to pay National Insurance Contributions on the value of the benefit.
Where can I read the official rules?
HMRC’s Employment Income Manual (EIM) contains the official rules of how these expenses are treated for tax purposes. The most relevant are: EIM32945 (mobile phones), EIM32940 (telephone costs) and EIM01474 (broadband).
Make sure you ask your accountant if you have any expense-related questions.