Expenses for contractors and their limited company

Determining what your business expenses are

Business expenses are costs that you and your business have incurred wholly and exclusively for the day-to-day running of your business. Depending on your type of business, these expenditures will vary, and can include things such as office supplies, utilities and everything else in between.

As a director of a limited company, you can use these deductible costs to lower the amount of tax you’re required to pay HM Revenue and Customs (HMRC). It’s important to note that only genuine expenses are allowed and HMRC has clear rules around what does and doesn’t constitute a business expense.

Knowing which expenses are allowed and which aren’t is vital. It ensures that you receive the tax deductions that are due to you, but just as importantly, it ensures that you pay the right amount of tax. You definitely don’t want to be saddled with the penalties that are handed out to businesses that pay less than they should on their tax bill.

How to determine which expenses you may claim

When your accounts and the accompanying Corporation Tax return are completed, these are some of the expenses you may be able to claim tax deductions for:

• Business mobile phones and landlines
• Business internet
• Laptops and other equipment purchased for business use
• Accounting services for your business
• Sustenance (such as lunches) for when you're working away from your usual place of business
• Working from home expenses (if you regularly work from home) in proportion to the amount of space and the time that you spend working from home
• Insurance, like professional indemnity
• Printing and advertising

If you paid for any of these expenses from your own (personal) means, of which relate to your limited company, you can claim back these costs from your limited company and repay yourself from your business bank account. In this way, your limited company is sure to have the maximum and legitimate expenses recorded so as to receive relevant tax relief.

See also: Reduce your accounting fees and still get the help you need

When an expense can’t be claimed

Unfortunately, not every cost you incur can be treated as an allowable expense. You can’t claim for things that you haven’t used. You also may not claim for items that have a dual purpose, i.e. things that can be used for your business and in a personal capacity. For example, if you purchased a suit for work that could be used for other occasions as well, you would not be able to claim this as an expense.

Why it’s important to have a proper record-keeping system

The most important thing to do is to keep records of all your business expenses as proof of your expenditure. Not only is this an HMRC requirement, it will also ensure that you claim everything that you are entitled to.

It’s recommended that you keep your records for at least five years to ensure that you’re covered should HMRC conduct an investigation or require any information from you.

Calculating your business expenses for your limited company’s tax return

When submitting a Corporation Tax return to HMRC, the amounts on it are derived from the financial accounts that accompany it. These should reflect all the business income and the allowable expenses for the applicable accounting period. You don’t need to include proof of these expenses when you submit your tax return, but you must make sure that your records are accurate as this will affect your final tax bill figure.

If you need help with any information regarding contracting, or contractors’ tax issues, get in touch with us via email or take a look at our contractor accounting services.