How to Navigate Allowable Expenses and Entertainment as a Limited Company

Why Limited Company Contractors Should Care About Allowable Expenses

There isn’t a business out there that doesn’t spend money in some way, it’s all part of growing, scaling and becoming a thriving part of the industry. Even if you have minimal outgoings and are a one-man-band enterprise, you’re still likely to spend money. You’re likely to have expenses that are regular and predictable - like rent or software subscriptions - and some that only come up when you need them, like travel or buying new equipment. HMRC lets limited companies take certain costs off of their taxable profit. This reduces your taxable profit, meaning you keep more money in the business.

The more allowable expenses you claim, the less you have to pay in tax. This doesn't lower the amount of money you have in the bank - after all, you've already paid for these costs - it just makes sure you pay the right amount of tax at the end of the year. But, you need to know which costs qualify. HMRC is strict, and you can only deduct costs that arewholly and exclusively for business purposes. 

Common Expenses That Limited Company Contractors Can Claim

Many business owners don't realise that the list of possible expenses is longer than they think, which means there’s a high chance there’s something you’re not claiming, that you should be. To ensure you’re making the most of being a limited company contractor, make sure you’re claiming for the following things.

Travel 

For a lot of contractors, travel is one of the most important types of expenses they can claim. But, what travel costs are usually okay? You can claim expenses for travelling to temporary jobs, but only if it’s a temporary workplace. You can’t claim travel expenses if you spend most of your time working there, or if it becomes a workplace you’re always using.

You can also claim public transportation costs - including trains, tubes, buses, taxis and flights and mileage for driving your own car or motorbike, which HMRC has set rates for. Business trips that require hotel stays can also be factored in, including food and drinks bought while travelling for business.

Business Support and Professional Services

If you’re one of the many contractors that offer outside experts to help you, you can factor business support and professional services into your allowable expenses. Most fees for professional services that are directly related to running the business are allowed, such as bookkeeping, accounting and professional memberships.

Office, Workspace and Tools

You can deduct a lot of the costs that come with working from home, in a coworking space, or in a traditional office. Some expenses that are allowed include rent for an office or a desk in a coworking space, business utility bills, office furniture, computers, laptops, tablets, business phones, wifi and office supplies, amongst others. If you work from home, you can use HMRC’s flat rate.

Business Insurance

Limited companies often need more than one insurance policy. The good news is that almost all important business insurance can be included in your allowable expenses. This includes professional liability insurance, public liability insurance and employers’ liability insurance. These policies protect your business and are required in many cases, so they’re classed as being tax-deductible.

Subscriptions, Digital Services and Tools

A lot of businesses rely on software and online platforms, and if yours does, you can claim the cost as an expense. This includes tools for managing projects - like Trello and Asana - cloud storage services, systems for customer relationship management, email automation software, marketing tools, graphic design tools, website domains, website hosting, and software for antivirus or cybersecurity. These are usually monthly or yearly subscriptions that happen over and over again, so it's important to keep track of them.

What are the Rules for Entertainment Expenses?

A lot of businesses incur entertainment expenses, but you can’t jump into claiming everything, as entertainment costs are a complex area of limited company expenses. In the eyes of HMRC, there are two types of entertainment expenses, and they’re not treated in the same way.

Staff Entertainment (Sometimes Allowed)

HMRC lets you deduct staff entertainment costs from your taxes, but only if all of the following are true:

• The event must be open to all employees, not just directors.
• The total cost for each person must not be more than £150 per year, including VAT and all other costs.
• If you go over £150, even by £1, the whole amount is a taxable benefit.

Staff entertainment is a legitimate business expense when it's done to reward and thank employees. Otherwise, it’s not always allowed.

Client Entertainment (Not Allowed)

You can't deduct money you spend on entertaining clients or potential clients from your taxable profit. This includes:

• Food or drinks for clients
• Tickets for sports events
• Corporate events or hospitality boxes
• Tickets to concerts or plays

You can still pay for these things through the company, but they won't lower your tax bill.

Common Limited Company Expense Mistakes

Limited company directors and contractors who have been around for a while can still make mistakes, and entertainment is where a lot of people trip up. 

Making a Claim for Items With Two Uses

If you’re making an expense claim, you can only claim the part of something that is strictly for business. If it can be used for both personal and business purposes, you need to work out the split, as you can only include the percentage that’s used by the business.

Claiming Meals Every Day

Unfortunately, you can’t claim all of your meals. You can only add meals into your tax-deductible expense claim if you buy meals on the way to a temporary job. You can’t go out for lunch every day, and then claim it as an allowable expense.

Not Keeping Proof

If you want to make a claim for business expenses, you need to have proof. HMRC can ask for receipts at any time, and they won’t let you claim for something unless you can prove what it was, when it was and that it was for business purposes. If you don't have proof, you could lose the deduction and get fined.

Putting Entertainment in the Wrong Category

Putting client meals under ‘staff entertainment’ or mixing categories is a sign that something is wrong. Don't mix them up, as it could bring your entire expense claim into question. If you want to keep everything above board, and not risk making a mistake or being investigated by HMRC, you need to make sure all of your expenses are categorised correctly.

Why it Makes Sense to Hire an Accountant for a Limited Company

A professional limited company accountant doesn't just file your tax return, they also help you to plan your whole financial future and maximise your tax-efficiency.

• They get the most out of your claims. Accountants know all the business deductions, even the ones you might not think of.
• The rules about taxes can change, and an accountant makes sure you meet HMRC's standards.
• With them handling your expenses, you have more time to focus on other aspects of running a business. You can focus on your projects instead of spending hours logging receipts, reconciling bank feeds, or looking up rules that aren't clear.
• They help you to make the right financial plans for the future. This includes getting profits out of taxes in a smart way, advising on the best time to buy equipment, recommending pension plans and planning for dividends.

At Go Limited, we believe anyone who runs a limited company needs to know how allowable expenses work and how the rules for entertainment fit into the picture. When done right, expense management can lower your taxes, make your business more profitable, and keep you out of trouble with the law. With the right knowledge - and a professional helping you out, if you choose to use the services of a limited company accountant - you can build a financial framework that supports growth, lowers risk and strengthens your bottom line.