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.

Deposits

Deposits are payments on account for goods or services that you might receive later.  A deposit payment might be offset against the purchase or it might be returnable at a later date. Deposit balances are usually posted to the balance sheet and do not affect your profit and loss account – at least not in the short term. The accounting entries would be to Credit Bank, Debit Deposits or Other Debtors in the balance sheet. This is an asset in your balance sheet because you have not offset it against the cost yet or you expect to get it back later – in the case of a rent deposit for example.

  • If the deposit is part payment of goods or services, the deposit would be allocated to the invoice once that has been received. You would only expect to pay for the balance of the invoice after deducting the deposit.
  • If you have paid a rent deposit, this might sit in your balance sheet for months or even years – depending on the length of your rental agreement. The rent deposit is an asset because you would hope to have it refunded in full at the end of the rental agreement – assuming of course there are no reparations to pay for – in which case all or part of your deposit might be offset against the repairs.
  • In either case, it is the invoice for the expenditure that is an allowable expense for business tax purposes.
  • If at any point it becomes clear that the deposit will not be refundable – say your supplier or landlord goes out of business – the deposit is no longer an asset and it can be written off to the P&L. The spend then becomes a tax deductible cost for your business.

Depreciation

Depreciation charges are created in your accounts when we write off your asset purchases over their estimated useful lives. Each business will decide on their own accounting policy for depreciation depending on the nature of their business, the use of the asset and how long the asset is likely to last.  A carpet for example might last longer in a small office with light footfall than it would in a childcare nursery or a busy shop. Here are some examples of depreciation periods for different classes of asset:

  • Plant and machinery are typically written off over a 5-15 year period
  • Fixtures and fittings such as shelves, carpet, internal walls (say you had your office refurbished)  etc might be written off over a 5-10 year period.
  • Office equipment, cupboards desks and chairs etc furniture are typically written off over a 4-5 year period.
  • Computer equipment is more likely to be written off over a three year period as they are more likely to become obsolete faster than your desk will.

The faster an asset is written off – the higher the depreciation charge is to the accounts which may be worth considering when you are defining your depreciation policy. When it comes to calculating tax on business profits – depreciation charges are disallowed and added back to create your taxable profits and we deduct capital allowances instead. Capital allowances are defined by HMRC and are the same for all businesses to ensure everyone pays and equal and fair amount of tax.

Directors remuneration

  • Directors remuneration is only relevant to a limited company who has directors rather than partners and is disclosed in the financial statements as required by The Companies Act 2008
  • Small owner/manager companies will typically pay their directors a minimal directors salary and maximum dividends  – see Tax Efficient Directors Salaries
We hope you find this series on expenses helpful. Please take a moment to check out our other articles.

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