Running a limited company comes with many costs, and some qualifying business expenses can be deducted when calculating the profits on which your company pays Corporation Tax. HMRC generally treats qualifying day-to-day business costs as revenue expenses. These are different from capital expenditure, such as certain purchases or improvements to long-term business assets, which may instead be dealt with under capital allowance rules.
Understanding this distinction is important because not every payment made from your business account automatically reduces your Corporation Tax bill. Expenses normally need to be incurred for legitimate business purposes and meet the relevant tax rules before they can be deducted when calculating taxable profits.
A company may incur everyday office and administrative costs such as stationery, printing, postage, software subscriptions, cloud services, telephone services and other office requirements. Where these costs are genuinely connected with operating the business and meet the relevant tax rules, they may normally be considered when calculating taxable profit. Accurate invoices and receipts should be retained to support the entries in your company accounts.
Many businesses also pay accountants, solicitors, consultants and other professional advisers. Certain professional fees relating directly to the company’s business activities can be deductible, although the precise tax treatment depends on what the professional service relates to. For example, ordinary accounting services may be treated differently from professional fees connected with acquiring a major capital asset.
Employee salaries and many associated employment costs can form part of a company’s deductible business expenditure, provided they are incurred legitimately for the purposes of the business. Maintaining accurate payroll records is particularly important because errors can affect not only Corporation Tax calculations but also PAYE and National Insurance reporting.
Advertising and marketing are another common area of business expenditure. Companies may spend money on websites, digital marketing, search advertising, social media campaigns, graphic design, printed marketing materials and other promotional activities. Marketing expenses incurred for legitimate business purposes may generally be included when determining taxable profit. Good documentation is especially important when a company uses multiple advertising platforms, agencies or service providers.
Business-related travel may also qualify as an expense depending on the purpose and circumstances of the journey. The rules can become more complicated when directors or employees combine personal and business travel, so records should clearly demonstrate why the journey was necessary and how it related to the company’s activities.
Purchasing computers, machinery, furniture or other long-term business assets does not always mean the entire cost is treated as an ordinary day-to-day expense. Some purchases are considered capital expenditure and may instead qualify for capital allowances. HMRC distinguishes these capital expenses from ordinary revenue expenses when calculating taxable profits, so it is important to apply the correct treatment.
Company money and personal money should also be kept separate. A purchase does not automatically become tax deductible simply because it was paid using the company bank account. Personal expenses can create additional accounting and tax issues, particularly for company directors. Maintaining a dedicated company bank account and accurate bookkeeping can make it much easier to identify business and personal transactions correctly.
Claiming allowable expenses correctly can legitimately reduce your company’s taxable profit and therefore the amount of Corporation Tax payable. However, incorrect, unsupported or incorrectly categorised deductions can create problems if HMRC reviews your company’s tax affairs. The aim should not simply be to claim as many expenses as possible, but to claim the correct expenses in the correct way while maintaining appropriate supporting records.
Many businesses miss legitimate deductions because their bookkeeping is incomplete or expenses have been categorised incorrectly. EasyFig can help organise your records, review your company expenses, prepare your accounts and calculate your Corporation Tax accurately.
Book a free consultation with EasyFig today and make sure your company is paying the right amount of tax — not more than necessary.