Updated on: Jan 8, 2024
Claiming expenses through your limited company is a great way to pay less tax. Your Corporation Tax is calculated on your company profit, which is your sales less all those company expenses, so the maths follows that the more expenses your company incurs, the lower the tax bill.
But there are a few points to bear in mind:
1. HMRC defines a company expense as being incurred wholly and exclusively for the purpose of business.
These are two very important conditions — if there is a duality of purpose, or you receive any personal benefit, the expenses will not be allowed.
2. ‘Incurred’ means that you are actually spending money. Although your company and you as an individual are two separate legal entities, spending company money still means less money in the company to pay out as dividends to you.
3. You absolutely need to justify your expenses and keep proper records — and this is not to us, or for us, but for the HMRC.
The case of K Fearson and HMRC (2019) should be a warning for all — this was around a consultant (F) and the lack of business records. HMRC opened an inquiry into his tax returns, and his travel and subsistence expense reimbursements. HMRC argued that some weren’t business expenses, and should have been treated as taxable pay, and furthermore due to there being so many errors the HMRC determined these must have been deliberate error rather than careless (which means higher penalties). This meant F had an extra £7,000 in tax and penalties.
But it could have been even worse. The HMRC could have further penalised the company for producing incorrect tax returns.
The HMRC has the power to charge a penalty for insufficient record keeping. There doesn’t need to be any evidence of errors for this penalty to apply, and the maximum fine is £3,000.
With Making Tax Digital it is also going to be much easier for the HMRC to find these errors, so there is no time like the present to get your systems in order.
The HMRC requires you to keep all records required to complete your tax returns, both personal and company. You must keep your records for at least 5 years after the deadline for filing any returns.
Records include, but are not limited to, any receipts or invoices for all expenses incurred, payslips, dividend vouchers, P11ds.