Properly managing business expenses is one of the most effective ways to reduce your limited company's Corporation Tax bill. However, HMRC has clear rules about what is and is not allowable. Claiming disallowed expenses can trigger investigations and penalties, while failing to claim legitimate ones means you overpay tax unnecessarily.
The Golden Rule: "Wholly and Exclusively"
For an expense to be deductible against Corporation Tax, it must be incurred "wholly and exclusively for the purposes of the trade." This HMRC test means the expenditure must have been made purely for business reasons, with no personal element. Where there is a mixed purpose (partly business, partly personal), the expense may be disallowed in full or apportioned.
Allowable Business Expenses
The following categories of expenditure are generally allowable:
- Staff costs: Salaries, employer NICs, employer pension contributions, and benefits provided to employees
- Office costs: Rent, business rates, utilities, cleaning, and office supplies
- Professional services: Accountancy, legal advice, recruitment fees directly related to the business
- Marketing and advertising: Website costs, SEO, advertising, business cards, and promotional materials
- Travel and subsistence: Train, bus, taxi, flights, and accommodation for genuine business travel (not commuting from home to a permanent place of work)
- Equipment and technology: Computers, phones, software subscriptions, and machinery used for business
- Professional subscriptions: Membership of relevant trade bodies and professional associations
- Bank charges: Business account fees and finance charges
- Research and development: Qualifying R&D expenditure (enhanced relief available)
Working From Home Expenses
If you work from home, your company can pay you a use-of-home allowance. HMRC allows £6 per week (£312 per year) without requiring supporting calculations. Alternatively, you can calculate the actual additional household costs attributable to business use based on the proportion of rooms and time spent working.
Mileage and Vehicle Expenses
If you use your personal vehicle for business travel, your company can reimburse you at the approved HMRC mileage rate (45p per mile for the first 10,000 business miles, 25p per mile thereafter). Keep a mileage log with dates, destinations, and business purposes.
If the company owns a vehicle, the treatment is more complex and depends on CO2 emissions, business/personal use split, and whether a Benefit in Kind arises.
Expenses You Cannot Claim
The following are commonly misunderstood and disallowable:
- Business entertainment: The cost of entertaining clients, suppliers, or contacts is not deductible for Corporation Tax (though staff entertainment up to £150 per head annually may qualify)
- Personal expenditure: Anything with a personal element — clothing (unless it is a uniform or protective clothing), personal meals, gym membership
- Fines and penalties: HMRC fines, parking tickets, and other penalty charges are not deductible
- Capital expenditure: Purchases of long-term assets (equipment, vehicles) are not expensed directly — they are subject to capital allowances instead
Keeping Records
HMRC requires you to keep receipts and records for all business expenses for at least 6 years. Digital records are acceptable. Use accounting software (Xero, FreeAgent, QuickBooks) or a dedicated app to photograph and store receipts at the point of purchase.
Frequently Asked Questions
Can I claim my home internet as a business expense?
If you work from home, you can claim a proportion of your home broadband costs as a business expense. The proportion should reflect the time and bandwidth used for business versus personal use. If you have a dedicated business line, the full cost is allowable.
Can my limited company pay for my mobile phone?
Yes. If the company contracts for and owns the phone and it is used primarily for business, the full cost (handset, contract) can be a company expense. HMRC has an exemption for one mobile phone per employee/director.
What is a trivial benefit, and can my company use them?
A trivial benefit is a gift or benefit worth £50 or less that is not cash or a cash voucher, not a reward for services, and not contractual. Directors can receive up to £300 worth of trivial benefits per tax year tax-free (e.g., a birthday gift or Christmas hamper).
Can I claim a laptop I bought before incorporating?
Potentially yes. If you transfer a pre-incorporation asset to the company, you can charge the company the lower of cost or market value. The company can then claim capital allowances on it.
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