When starting a limited company, one of the most popular questions people ask is what they’re legally entitled to claim back as expenses. This is an extremely broad topic with all industries differing on what will be included in expenses, but there are certain parameters and regulations HMRC enforce across all companies that you should be aware of.
Any business expenditure that was paid for by someone personally can be re-paid back through the company. Therefore, any business expenses that your company compensates may receive tax relief. It’s in cases like this where the collective expenses cost is deducted from total revenue; it’s the difference that ends up being taxed. To give an example, a company turnover of £20,000 with £2,500 in business expenses will be expected to pay corporation tax on £17,500.
It’s important to note that the above is purely a fictional example to better explain the concept of expenses with regard to tax. In reality, your overall tax bill will also take into account VAT flat rate and PAYE salaries if applicable.
For expenses to be legitimately paid back, they must be exclusively for business use only. If you start using your personal funds to consistently pay for things under business time, things can get very complicated so it’s important to keep company expenses as clear as possible.
Any expense that isn’t for the sole purpose of the company is unlikely to be accepted as a business expense. For example, if you buy a laptop to use for work but also end up using it for personal matters too, it isn’t a legitimate-enough expense in the eyes of HMRC. But, if you were to buy a specialised computer with advanced software for the sole purpose of being used for work, you’re a lot more likely to have this expense accepted.