Corporation Tax: Allowable Expenses for a Limited Company

A limited company pays corporation tax on its profits, and the more of your genuine business costs you can deduct, the lower those profits and the tax. But "I paid for it through the company" is not the same as "it is deductible". This guide explains how to tell the difference, with the main categories of costs and the traps to avoid.

Key takeaways

• An expense is generally allowable if it is incurred wholly and exclusively for the company's trade.
• Some costs are never deductible, such as fines and most client entertaining.
• Capital items are handled through capital allowances, not as ordinary expenses.
• Personal spending through the company can create tax problems for you as well as the company.

The basic test

For corporation tax, the company's taxable profit is its income less allowable costs, adjusted for items the tax rules treat differently. The key test is whether the cost was incurred wholly and exclusively for the company's trade. A cost with a clear personal element generally fails it, unless the business part can be separated. The corporation tax rates themselves, including the small profits rate and marginal relief, are covered in our guide to corporation tax marginal relief. HMRC's own guidance is on GOV.UK.

Common costs and how they are treated

Salaries, benefits and director costs

A director's salary is normally a deductible cost, as are employer National Insurance and employer pension contributions, as long as they are for genuine work. Dividends are not deductible because they are paid from profits after tax. Benefits in kind provided to directors or staff can be deductible for the company but also create reporting and tax consequences for the individual. Our guide to the true cost of an employee shows how employment costs build up.

Capital items and capital allowances

When the company buys equipment, a vehicle or machinery that will last, the cost is not usually deducted in full as a day-to-day expense. Instead the company claims capital allowances under rules that are set by HMRC and change over time. Depreciation in the accounts is added back for tax. Check the current allowance options on GOV.UK's capital allowances page or ask your accountant which applies. Our company accounts service deals with these adjustments each year.

Worked example (illustrative)

"Nadia", an illustrative example, runs a small delivery company. Over the year her company pays for accountancy, vehicle insurance, a work phone, software and a new cargo van. It also pays a parking fine and takes a client out for lunch. The accountant treats the accountancy, insurance, phone and software as deductible expenses, and the van goes through capital allowances rather than as a one-off expense. The parking fine and the client lunch are added back as disallowable. The result is that the company's taxable profit is a little higher than its accounting profit, which is a normal outcome and exactly why tax adjustments exist. No real amounts are given because the figures here are invented to show the method.

Keeping the records HMRC expects

Keep invoices and receipts in the company's name, note the business purpose where it is not obvious, and pay business costs from the company account where possible. If you pay personally, record it so that the company can reimburse you or credit your director's loan account. The director's loan account needs to be tracked carefully. Good bookkeeping makes the year-end smoother, which is the aim of our bookkeeping service.

Common mistakes

• Putting personal costs through the company. They are not deductible and can create a tax charge on the director.
• Claiming client entertaining. It is generally disallowed.
• Expensing capital purchases. Equipment goes through capital allowances.
• Claiming without evidence. A claim you cannot support can be withdrawn.
• Treating dividends as a cost. They come out of after-tax profit.

Want your company's costs reviewed before the year-end? Our corporation tax service covers computations, adjustments and filing. You can also contact us to talk it through.