One of the most common questions from UK limited company directors is: "What expenses can I claim?" Understanding what you can and can't claim is crucial for accurate bookkeeping and ensuring you're not overpaying tax.
This guide explains allowable business expenses for UK micro-entity limited companies, with a focus on cash-basis accounting rules.
The Golden Rule: Wholly and Exclusively
For an expense to be allowable, it must be incurred "wholly and exclusively" for business purposes. This means:
- Wholly: The entire expense must be for business (though you can claim a proportion of mixed-use items)
- Exclusively: The expense must be for business purposes only, not personal benefit
If something has both business and personal use (like a mobile phone or home office), you can claim the business proportion only.
If you're using cash-basis accounting, you claim expenses when you actually pay for them, not when you receive the invoice. This guide assumes you're using cash-basis, which is common for micro-entities.
Common Allowable Expenses
Here are the most common expense categories for UK micro-entity limited companies:
1. Office Costs
You can claim expenses for running your office, including:
- Office rent (if you rent commercial space)
- Business rates
- Utilities (electricity, gas, water) for business premises
- Office cleaning
- Property insurance for business premises
2. Working from Home
If you work from home, you have two options:
- Simplified expenses: Claim a flat rate based on hours worked (e.g., £10/month for 25-50 hours, £18/month for 51-100 hours, £26/month for 101+ hours)
- Actual costs: Calculate the business proportion of your home costs (mortgage interest or rent, council tax, utilities, internet, insurance) based on the space and time used for business
3. Equipment and Supplies
Costs for items you need to run your business:
- Computer equipment and software
- Office furniture and equipment
- Stationery and postage
- Phone and internet costs (business proportion)
- Repairs and maintenance of business equipment
4. Travel and Vehicle Expenses
Business travel costs (but not commuting from home to a permanent workplace):
- Public transport for business trips
- Hotels and accommodation for business travel
- Parking fees for business journeys
- Vehicle expenses (either actual costs or mileage allowance at 45p per mile for first 10,000 miles, 25p thereafter)
Note: Travel from home to your regular workplace is not allowable. Only travel to visit clients, attend meetings, or temporary workplaces can be claimed.
5. Professional Services
Fees paid to professionals who help run your business:
- Accountant's fees
- Legal fees for business matters
- Business insurance
- Professional subscriptions and memberships
- Consultancy fees
6. Marketing and Advertising
Costs to promote your business:
- Website hosting and domain names
- Advertising costs (online and offline)
- Marketing materials (business cards, brochures)
- Social media advertising
- SEO and digital marketing services
7. Staff Costs
If you employ staff (including yourself as a director):
- Salaries and wages
- Employer's National Insurance
- Pension contributions
- Staff training and development
- Recruitment costs
8. Bank Charges and Financial Costs
Costs related to business banking and finance:
- Business bank account fees
- Credit card charges for business cards
- Interest on business loans (but not capital repayments)
- Hire purchase interest (but not capital element)
What You CANNOT Claim
It's equally important to know what isn't allowable:
- Personal expenses: Anything for personal use, not business
- Client entertainment: Taking clients out for meals or entertainment (though staff entertainment is allowable)
- Fines and penalties: Parking tickets, speeding fines, late filing penalties
- Clothing: Ordinary business clothing (suits, shirts, etc.) unless it's protective clothing or uniform with company branding
- Commuting costs: Regular travel from home to your normal place of work
- Donations: Unless they're small donations to local charities and provide advertising benefit
- Personal subscriptions: Gym memberships, personal magazines, personal insurance
Special Considerations for Cash-Basis Accounting
If you're using cash-basis accounting (which most micro-entities do), remember:
- You claim expenses when you pay them, not when you receive the bill
- Capital expenses over £1,000 for a single item must be spread over time (capital allowances), not claimed all at once
- Stock purchases are claimed when paid for, not when sold
- You can't claim expenses that you haven't actually paid yet
Record-Keeping Requirements
For any expense you claim, you must keep:
- A receipt or invoice showing what was purchased
- The date of purchase
- The amount paid
- Evidence it was for business purposes
Keep all records for at least 6 years from the end of the financial year they relate to.
If you're unsure whether something is allowable, it's always best to ask your accountant. Claiming non-allowable expenses can result in penalties from HMRC, while missing allowable expenses means you're paying more tax than necessary.
Practical Tips
- Keep it separate: Use a business bank account and business credit card to make tracking easier
- Save receipts immediately: Take photos or scan receipts as soon as you get them
- Categorize as you go: Don't wait until year-end—categorize expenses monthly
- Document mixed-use items: Keep notes on how you calculated business proportions
- Be conservative: If an expense has significant personal benefit, don't claim it or only claim a genuinely business proportion
Summary
Understanding allowable expenses is essential for accurate bookkeeping and tax compliance. The key is remembering that expenses must be wholly and exclusively for business purposes, and keeping thorough records to support your claims.
For cash-basis micro-entities, claim expenses when you pay them, and always keep receipts. When in doubt about whether something is allowable, consult your accountant—it's worth getting it right.
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