One of the most common questions we get from freelancers, contractors and business owners is, 'what can I expense via the business'?
In short, HMRC’s general rule is that any expenses must be “wholly, exclusively and necessarily” for business use.
That means you would need to be comfortable justifying to HMRC that the expenditure was incurred for the business, as opposed to for you personally. However, to help give you an idea of the typical business expenses that you might incur, as well as a couple of useful allowances, we’ve compiled a list below:
This is sometimes referred to as an “annual Christmas party allowance”, but in truth, it can be used for any annual events such as a summer party. In a nutshell, HMRC allows companies to spend up to £150 per employee on a tax deductible annual event without incurring any personal taxes either. However, rules do apply, such as not being able to go 1p over £150, so do read more on this within our full blog here.
Whilst there is an allowance for staff entertainment, as discussed above, there is no such allowance for client entertainment. Whilst your business can expense business entertainment costs, such as taking out current or prospective clients, your business won’t receive corporation tax relief on it. Despite this, it’s still more beneficial to pay for this via your company, as opposed to with your personal funds. However, to stay on the right side of HMRC, it’s important to ensure these are genuine business entertainment expenses and that you don’t go overboard.
It is possible to make charitable donations to valuable causes via your business, but it’s important that these are to registered charities or qualifying charitable organisations. These contributions will reduce your company’s taxable profits, and as such, your company will receive Corporation Tax relief. Whilst most contributions to registered charities will qualify for tax relief, there are some conditions where payments won’t qualify, however, these tend to be less common arrangements, such as if the payment was made as a loan to be repaid.
Whilst plenty of small business owners will claim mileage if they need to travel by car, bike or bicycle (see our guide on this here), if you are looking to get a new vehicle, it may be worth weighing up purchasing a company vehicle. Whilst it can be more straightforward for bicycles for example, as we discuss here, there is plenty more to consider when it comes to company cars. Company cars are classed as a ‘benefit in kind’, so will incur additional taxes, so it’s always worth getting advice from an accountant (like those at Mighty!) before you purchase a company vehicle to make sure it works out better as opposed to purchasing personally.
A common expense for business owners will be computer equipment. This can range from laptops and computers through to the associated equipment like mouses, keyboards and printers and typically, these will reduce your company’s corporation tax. Whilst it would be fine to use the equipment personally from time-to-time, you would need to be comfortable justifying that the main requirement and most significant use of these is for the business rather than you personally. For higher value equipment, such as laptops, these will be classified as an ‘asset’ in your accounts and subject to depreciation each year, but Mighty takes care of that for you!
When you are a small business, you often need to lean on the expertise of others, so you may incur consultancy or subcontractor fees in order to complete client projects and work. When incurred to support your business’s trade activity, they would be allowable business expenses and reduce your corporation tax bill.
When it comes to food and subsistence, it’s important that any costs are incurred in relation to travelling for the business. For example, if you are working at home or at your normal place of work, you shouldn’t be expensing your lunch through the business. However, if you need to travel for work or stay overnight, you can claim reasonable food and subsistence costs, and reduce your corporation tax as a result.
Often, you’ll find that it’s a requirement of the clients you work with, but even if it isn’t, it’s important that small businesses have business insurance in place. Commonly, this will include professional indemnity and public liability insurance, both of which would be a tax-deductible business expense. However, we have a full guide on business insurances in our blog here.
Outside of strictly business insurance, some businesses will also look to pay for the director’s medical insurance via the business. However, there will be tax implications to doing so, which we cover in our medical insurance blog here.
If your company needs to pay any legal fees, providing these are related to the business, then these legal costs can be expensed via the business and will attract corporation tax relief. Common examples for this would include reviewing business contracts and agreements, whereas expenses that wouldn’t be allowed would be any personal legal expenses.
Marketing, advertising and PR costs that you incur to help promote the business will be an allowable expense that will reduce your corporation tax. There’s a wide range of things this could include, from domain names through to promotion materials or fees to marketing agencies.
If it is needed for the business, it is possible to purchase a mobile phone through the business as well as paying for the ongoing monthly contract. Whilst this will receive corporation tax relief, it’s important to be aware of the rules, such as needing the contract to be within the company’s name to avoid any pitfalls. We cover this in our full blog here.
Paying into a pension from your company is not only an allowable expense, it’s an extremely tax efficient way to save for retirement. Whilst there are things to consider, such as the annual allowance, which at £60,000, isn’t applicable to most, you will reduce your taxable profits by paying into a pension, thus reducing your corporation tax. Not only that, it is also money that you would otherwise have to pay personal taxes on to extract from the business (i.e. via salary or dividends), so most choose to pay into a pension through their company as opposed to personally.
Providing they are relevant to your trade activity and beneficial to your business, memberships for professional bodies and trade associations can be expensed via the business. However, for the membership costs to be tax-deductible, they need to appear on HMRC’s approved list of organisations (linked here). We cover more on professional membership costs within our wider training costs blog here.
In today’s world, it’s very difficult to run a business without being tech-enabled through software licences and subscriptions. As such, this is a very common business expenditure for freelancers and small businesses which will reduce the company’s corporation tax bill. As with all expenses, the “wholly, exclusively and necessarily” for business use rule applies, so this unfortunately means no Spotify or Netflix subscriptions!
For one-person companies, training and education can be an important driver for improving the business, given that they are the business. Whilst they can be allowable business expenses and receive corporation tax relief, HMRC has specific rules for training costs, such as the costs need to be to enhance an existing skillset that is relevant to the company’s trade activity. To read our full blog on claiming training costs, click here.
If you need to travel for business purposes, then this will often be an allowable business expense that you will receive corporation tax relief on. However, the site that you are travelling to must either be a temporary workplace (i.e. you don’t spend more than 40% of your working time here) or it must fall outside of the 24-month rule (i.e. you haven’t been/or won’t be travelling to the same workplace for 24-months or more).
This travel could be via public transport, or you may choose to claim mileage, which we cover along with the above mentioned rules in our mileage blog (linked here).
There are some tax-deductible benefits of up to £300 per year that you can pay for via the business that HMRC class as ‘trivial’. These will commonly be gifts or vouchers, but important rules apply, such as the individual benefits cannot exceed £50 each or be cash. We cover this in more detail in our trivial benefits blog here.
Whilst many small business owners will pay for desk space at coworking spaces, which would be an allowable business expense, many will work from home instead. For those that work from home, HMRC has a flat rate use of home allowance of £312 per year that business owners can pay themselves that also reduces their corporation tax. There are alternative methods to this flat rate, which we cover in our blog here, which also talks about the equipment costs you may incur, such as office furniture.
As stated above, this isn’t intended as an exhaustive list, but merely to give common examples of what small businesses can expense via their business. There will be plenty of expenses that fall outside of the above, so it’s important to remember the “wholly, exclusively and necessarily” for business use rule. However, as a Mighty client, if you’re unsure, you can always ask us for advice. If you’re not a Mighty client, get in touch to discuss how we can support you.
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