Claimable Expenses for a Limited Company: Do’s & Don’ts, Risks, and HMRC Implications

Running a limited company can be both exciting and challenging. One area that often causes confusion is claimable expenses. What can you claim? What should you avoid? And what are the risks involved if HMRC comes knocking? We’ve got you covered. Let’s break down the do’s, don’ts, risks, and HMRC implications, with examples relevant to small businesses.

What are Claimable Expenses?

Claimable expenses are costs that are wholly and exclusively incurred for business purposes. These expenses reduce your company’s taxable profit, lowering the amount of Corporation Tax you owe. As a director of a limited company, it’s essential to understand which expenses are legitimate to claim and which could land you in hot water with HMRC.

Do’s & Don’ts of Claiming Expenses

Do’s

Keep Detailed Records
Always keep receipts and records of every business expense. HMRC requires evidence to support your claims, so maintain organised records.

Claim Only Legitimate Business Expenses
Expenses must be ‘wholly and exclusively’ for the business. For example, office supplies, professional fees, software subscriptions, and travel costs (when travelling for business purposes) are allowable.

Understand Capital Expenditures
Larger expenses like machinery, vehicles, or office equipment might be capital expenditures. These can’t be deducted immediately but can be claimed through capital allowances. For instance, if you buy a new computer for work, you can claim a portion of its cost over time.

Consider Home Office Costs
If you work from home, you can claim a portion of your home expenses like electricity, internet, and heating. Use a reasonable method, such as claiming a percentage based on the square footage of your workspace.

Stay Within HMRC’s Limits for Certain Expenses
For example, there’s a limit of £150 per employee for annual staff parties. Anything above that is taxable.

Don’ts

Don’t Claim Personal Expenses
Avoid mixing personal and business expenses. Even if it’s for something as small as lunch with a friend, claiming it as a business expense is a red flag for HMRC.

Don’t Overestimate Mileage Claims
If you use your car for business, you can claim a mileage allowance. However, be precise with your records. Inflating your mileage can lead to scrutiny from HMRC.

Don’t Guess at What’s Allowable
If you’re unsure whether something qualifies as a business expense, it’s better to ask Helpbox. Guesswork can lead to rejected claims or, worse, penalties.

Don’t Double-Dip
Make sure you’re not claiming the same expense twice, such as both a mileage allowance and petrol costs for the same journey. HMRC will catch on quickly!

Risks of Incorrect Claims

Claiming the wrong expenses can lead to serious trouble with HMRC. Here are some risks to keep in mind:

• Penalties: If HMRC finds that you’ve claimed expenses incorrectly, whether intentionally or not, they can issue penalties. These penalties range from fines to interest charges on underpaid tax.
• Investigations: HMRC has the authority to investigate your company’s accounts. If they suspect fraudulent activity or carelessness, they can open a formal investigation, which could take months and create financial strain.
• Reputation: An HMRC investigation, even if unintentional mistakes were made, can damage your business’s reputation. It’s best to avoid this by staying on the right side of the rules.

Potential Implications with HMRC

HMRC scrutinises businesses that attempt to reduce their tax bill by claiming incorrect expenses. Here’s what can happen if you don’t follow the rules:

1. Compliance Checks
   If HMRC flags discrepancies in your expense claims, they may initiate a compliance check. This can involve going through your accounts with a fine-tooth comb, including reviewing your receipts, invoices, and bank statements.
2. Assessments and Adjustments
   HMRC can re-assess your tax returns and adjust them, potentially increasing the amount of tax due. This could result in significant backdated payments.
3. Fines and Penalties
   If HMRC determines that your incorrect claims were deliberate or due to negligence, fines will be imposed. Penalties vary based on the severity of the situation but can be as high as 100% of the tax underpaid.
4. Criminal Charges
   In extreme cases, where deliberate tax evasion is found, HMRC may pursue criminal prosecution, which could lead to court proceedings and even imprisonment.

Examples of Claimable Expenses by Business Type

Different types of businesses will incur different types of expenses. Here are a few examples:

1. Marketing Agency

• Claimable: Office rent, computer equipment, software licences (e.g., Adobe Creative Suite), travel costs to visit clients, training courses for staff.
• Non-Claimable: Client lunches that aren’t directly related to business work, non-business-related travel (such as travelling for personal meetings).

2. Construction Company

• Claimable: Tools, safety equipment, van costs (including insurance if used solely for work), subcontractor fees, materials used for projects.
• Non-Claimable: Personal use of the van, personal protective equipment used outside of work, fines (such as speeding tickets while on the job).

3. Freelance Consultant (Working from Home)

• Claimable: Home office expenses (a portion of your rent or mortgage interest, utilities, internet), travel expenses for client meetings, professional development courses.
• Non-Claimable: Family vacations, personal utility bills beyond the business use portion, gifts for clients that exceed the HMRC limit (£50 per client).

Understanding what is and isn’t claimable as a limited company expense can save you a lot of trouble down the line. By following the do’s and don’ts, keeping detailed records, and avoiding personal claims, you’ll stay on the right side of HMRC. However, mistakes can happen, and HMRC’s penalties are no joke. That’s why it’s always best to consult with Helpbox if you’re unsure. Our team will ensure you maximise your allowable expenses while staying compliant with tax laws.