Corporation Tax is a good example of a tax liability that can be significantly reduced if done right. By aligning your company’s annual profit against its annual costs, you may be able to lower your tax bill quite substantially.
In this guide, we will review the most common business expenses you could claim back, before reporting to HMRC the actual profit value of your company and potentially decreasing its tax liability.
How revenue and business costs affect your Corporation Tax bill?
Corporation Tax is charged at a 19% rate out of your company’s annual profit. This annual profit will initially be calculated on the Company Tax Return.
When it comes to ‘Profit’, the annual revenue generated; will make it go UP and the business costs, Capital Allowances and other tax reliefs applied against the revenue, will make the profit go DOWN.
.. And yes, you guessed right, a smaller profit should in turn, reduce your corporation tax bill.
To help you keep your accounts in order and make sure all deductible costs are applied to your Company Tax Return, we have prepared the below guide, which describes in which conditions you can include certain business costs in your company tax return and reduce your tax liabilities.
What allowances, expenses and other tax reliefs can be deducted?
What are allowable business expenses?
Naturally, this type of business expenses must have been incurred “wholly and exclusively” for the purpose of the business operation. The costs claimed must be work-related or occurred during the process of attracting new or future business.
For example, a train ticket purchased for a client meeting is claimable. However, if that meeting occurs during a personal holiday, that would not be considered by HMRC as a claimable expense.
Most common expenses
The type of expenses you could include in your company tax return includes a variety of business-related activities. Here are the most common ones:
You can claim travel expenditure through your limited company when you travel to a destination for business purposes.
Travel costs may include:
- Public transport
- Fuel – when it’s a company vehicle.
- Mileage – when the vehicle is owned by the employee.
- Parking fees
- Toll fees
- Food and drinks
- Overnight accommodation
- Business calls
’24 months rule’
If you work under a contract and need to travel from home to your place of work, you can claim back commuting costs if you are contracted at that location, for less than 24 months. It’s important to note that if your trading address is different than your home address, meaning your limited company has an office – in this case, you won’t be able to claim commuting costs from your home to your company’s office.
For more info got to our 24 months rule guide.
Food and meals
If you qualify for travel between your home and work, you will also be able to claim subsistence. You can either claim on a receipt-by-receipt basis or on a flat-rate approach.
On a flat-rate basis, the amount claimable is calculated on the number of hours you are away from home.
Irrespective of how you claim subsistence, always keep your receipts in case your claim is ever queried by HMRC.
|5 – 10 hours away from home||£5|
|10 – 15 hours away from home||£10|
|Over 15 hours (and beyond 8pm) away from home||£25|
|If working beyond 8pm supplementary rate||£10|
Claimable allowances are also available for costs incurred during a business trip, with or without an overnight stay.
Travelling to and from work isn’t included here unless you’re travelling to a temporary place of work.
When travelling for business, you can claim
Tax relief for costs incurred on:
- public transport
- hotel and B&B accommodation, if you have to stay overnight.
- food and drink
- congestion charges and tolls
- parking fees
- business phone calls and printing costs.
Using your home as an office
You can claim £6 per week from the company, for using your home for work-related duties. That will translate into £312 annually.
Telephone & Internet
A business mobile phone in the business name and used wholly for business use, would be an allowable expense. Normally, you wouldn’t be able to claim back costs for personal line rental or charges for your personal mobile phone. However, if the mobile phone is in the company name and it is only 1 per employee, it doesn’t have to be used wholly for business use.
The restriction of the exemption in Section 319 to one mobile phone for private use, does not alter the treatment of mobile phones provided solely for business use, which continue to be exempt under Section 316 ITEPA 2003, as long as any private use is not significant – EIM21779 – Particular benefits: mobile telephones: exemption for 2006/07 onwards
Furthermore, business calls which are charged separately within a personal plan or via a dedicated business plan, are claimable.
Claiming a reasonable amount of internet costs is generally accepted and based upon your level of estimated usage.
Likewise, with a home phone, you can also claim for the business part of the costs incurred. If you have a business contract you can claim the whole cost.
You can claim back lower-cost equipment which may be used for short terms.
These might be:
- phone, mobile, and internet bills
- printer ink and cartridges
- computer software
- computer software if your business makes regular payments to renew the licence.
More costly equipment you would normally use for longer periods, would be claimable under Capital Allowances.
Training and courses
Claimable only when used to improve the knowledge or skills you use for your business.
You can’t claim back training costs when they are related to starting a new business or expanding your company’s trading areas to other business sectors.
Legal and financial costs
You can claim expenses for hiring an accountant, solicitor (not applicable when you break the law) or premium payments for business insurance.
You can also include business banking-related fees, such as:
- business loans
- higher purchase interest
- leasing payments
Additionally, and if you use Traditional Accounting, you could be able to claim back a ‘Bad Debt’. In a case where you are certain that the client will not deliver the payment.
Marketing and PR
You can claim for:
- advertising in newspapers or directories
- bulk mail advertising
- free samples
- website costs
You cannot claim business expenses for:
- entertaining clients, suppliers and customers
- event hospitality
You can claim for:
- trade or professional journals
- professional organisation membership if related to your business.
Entertainment for clients is not a tax-deductible expense, but an event for staff and their plus ones certainly is and thus can be claimed back. Your company can claim its event costs as a deductible expense against corporation tax as long as you observe the following rules:
- It’s open to all staff
- You spend no more than £150 per person.
- The event is an annual one, such as a Christmas party.
Trivial Benefit is a low-value, tax-deductible gift provided by the employer to an employee. An employer does not pay tax for the benefit provided if the following conditions are met:
- The gift or benefit was not given in a form of cash, cash vouchers or other forms of cash equivalent.
- The value of each gift must not exceed the amount of £50 per employee.
- The benefit was not given as a reward for the professional performance of an employee.
- The benefit is not part of the employee’s contractual agreement.
You can claim :
- Protective clothing needed for your work.
- Costumes for actors or entertainers.
This isn’t applicable to everyday clothing.
Health treatments and eye tests
Where the company is required to provide a visual display unit (VDU) as part of the employee’s work duties, any eye tests, spectacles or contact lenses costs would be claimable as a business expense, by the company.
In cases where the use of spectacles is made during working hours and out of work activities, the cost of a VDU prescription will be exempt.
You can find more details on HMRCs guide for cost exemptions of eye test and other medical check-ups.
What are Capital Allowances?
You can claim Capital Allowances for business equipment you normally use for longer than a two year period.
To claim it, you will need to apply any relevant costs under the dedicated Capital Allowances section within your Company Tax Return.
This may be relevant to purchases of:
- cars, vans and lorries
- heavy machinery
- other long term purchases of business equipment
- renovating business premises in disadvantaged areas of the UK
- extracting minerals
- research and development
- ‘know-how’ (intellectual property about industrial techniques)
- structure and buildings
Other tax relief schemes
If your company has stopped trading and incurred trading losses in the past 12 months, you would be able to carry back those losses against company profits made in the last 3 years.
Always discuss with your accountant
This is not an exhaustive list and there may well be other items that are relevant to the work you undertake.
For further queries, our dedicated accountants will always be happy to help clarify what can be claimed and what cannot.