The rules for allowable business expenses are generally similar for limited and unlimited companies, with some subtle exceptions. Where there are differences  – these are identified in the guide below.
Childcare vouchers

  • Fully allowable. Staff in the basic rate tax bracket may be paid up to £243, whereas staff in the higher rate tax bracket may be paid up to £124.
  • Directors on basic rate salary may be paid childcare vouchers in addition to their basic directors salary.

Childcare vouchers may be claimed for children up to his or her 15th birthday, 16th if disabled. To be eligible for childcare vouchers, the parent must meet the following conditions:

  • The child must be living with you
  • You must be responsible for the child’s maintenance costs
  • You must use a registered childcare provider

Christmas Party See also: Entertainment: Staff Entertainment

  • Reasonable costs of entertaining staff ARE allowed as HMRC consider this to be part of the cost of managing and motivating staff
  • Staff must be employed staff on payroll, not subcontractors who are really suppliers and fall under business entertainment
  • The company is allowed to spend £150 per employee (including VAT), per year, on staff entertainment – this might be a summer barbecue and/or a Christmas party.
  • Please note – the £150 limit covers the total costs of all events provided during the year, it is not £150 per event.
  • The £150 exemption covers all costs – not just the party itself, so if you pay for any transport or overnight accommodation – this must be included in your total event cost.
  • It must be open to all staff and must be a staff event. If the event is for clients, but staff attend, then it is considered to be Business Entertainment
  • Any money the company spends inviting partners or spouses of employees must also be included total event cost, and must still amount to £150 or less per employee attending for it to be tax free for your employees.
  • The £150 limit is not an allowance – it is an exemption – so be careful not exceed the £150 per person limit as this will mean the entire amount is disallowed, not just the excess over £150.  If your party costs £151 per head, then the taxable benefit in kind is £151 not the excess of £1. If your staff member brought a partner or spouse to the event, then they will be taxed on the total benefit in kind of £302.
  • Even a small company with just two or three employees are able to claim up to £150 per employee for your Christmas party

PSA

  • Where a benefit in kind tax does arise, you may set up a PAYE settlement agreement (PSA) to relieve your employee of any liability. Costs will be grossed up and the tax and NI will be paid by the employer. This can be quite expensive if you have staff in the higher tax brackets so be sure to keep an eye on your budget if you want to avoid the additional tax.

VAT

  • VAT on costs incurred on staff entertainment are recoverable in your VAT return
  • Any money spent on partners or spouses is viewed as business entertainment and must be accounted for gross as they are are NOT allowed for VAT purposes

Corporation Tax

  • Costs incurred on staff entertainment are allowed for corporation tax
  • Any money spent on partners or spouses is viewed as business entertainment and are NOT allowed for corporation tax.

Accounting Treatment

  • We recommend you separate staff entertainment and business entertainment costs in your accounts so that you can monitor the level of spend per employee during the year and so that the costs are clearly identified when it comes to preparing your accounts and tax returns at year end.
Cleaning

  • General business cleaning costs are an allowable business expense for tax purposes. This might include basic cleaning expenses such as washing up liquid and sponges or the cost of employing a cleaning service.
Clothing

  • General business clothing is not allowable as these will fail the duality of purpose test – we need to wear clothes to stay warm and protect our modesty.
  • Clothes with your corporate branding such as polo shirts, sweatshirts, jackets and hats that help promote your business are generally allowed if the expense is reasonable for your business. Branded clothing worn by staff when they are at work as uniform would be allowed but a nice new suit bought by the business owner is not allowed as that fails the duality of purpose test.
  • Safely and protective clothing, such as steel toe cap boots and high visibility jackets are allowed.
Commuting

  • Normal commuting costs when travelling to your normal place of work are disallowed. An employer wouldn’t normally pay for the cost of an employees’ travel to work, the same applies here with your own business.
  • Travel to a temporary place of work (i.e. where you have to leave your normal place of work to carry out that work) may be allowed and is covered under Mileage.
Companies House fees

  • Annual filing fees for limited companies are an allowable expense.
Company formation fees

  • Formation fees are allowed for corporation tax purposes – although the fee is incurred before the company exists, it can be claimed as a business expenses as it it were incurred on day 1.
  • The formation fee can be paid by the business, or reimbursed to the director who will have most likely paid them before a business bank account was set up.
Computer equipment  (Hardware and Software) Hardware

  • All business related PC’s, laptops,tablets and peripheral equipment used in the business are allowed.
  • If you are using your own PC in your new business, you could sell the computer to the business (at current market value) this is also allowed.
  • Typically – we will capitalise the hardware – i.e. show it as an asset in your balance sheet and depreciate it over it’s estimated useful life – typically 3 years.  You can currently use your annual investment allowance to claim the whole expense against profits in the year of purchase.

Software

  • Computer software, depending on its life span, can be either claimed as an expense or capitalised and included in the annual investment allowance claim. If the software is a significant upfront cost with no annual renewal – it may be capitalised.
  • If the software is upgraded yearly then it would be normally be expensed to your profit and loss account but spread over the period of the agreement – usually 1 year.
Consultancy Business as usual consultancy

  • All business related consultancy or professional costs are allowed, so long as the cost is genuinely related to the running of your business.
  • Consultancy come in many forms, usually consultants or professionals are engaged where they have a skill that you don’t – HR consultants, software and systems trainers , solicitors, legal advisers, health and safety consultants to name but a few.
  • Typically – we will expense consultancy costs to your profit and loss account taking the tax benefit in the year that the expense is incurred.
  • Consultancy fees is an interest for HMRC, if they are looking at your accounts and ask for a breakdown of your consultancy or professional fees, they are looking to see that your consultants are genuine consultancy and are not disguised employees.

Capitalised consultancy

  • In some instances, it may be possible or appropriate to capitalise consultancy fees.  If for example, you had to pay a consultant to help with the commissioning of a fixed asset, then the cost of the consultant could be capitalised as part of the purchase cost of the fixed  asset.
We hope you find this series on expenses helpful. Please take a moment to check out our other articles.

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