One of the genuine advantages of running a limited company is that allowable business expenses reduce your taxable profit — and by extension, the amount of Corporation Tax you owe. Get it right, and you’re running your finances efficiently. Get it wrong, and you’re either leaving money on the table by not claiming enough, or creating problems with HMRC by claiming things you shouldn’t.

The rules around what a limited company can and can’t put through as an expense are more nuanced than most people realise. This article explains the key categories, the common grey areas, and the mistakes that tend to cause the most trouble.

The Golden Rule: Wholly and Exclusively

Almost everything in limited company expenses comes back to one phrase from HMRC’s guidance: the expense must be incurred wholly and exclusively for the purposes of the business.

If a cost has a dual purpose — partly personal, partly business — it generally can’t be claimed in full. In some cases, you can apportion the cost and claim the business element. In others, the dual-purpose nature of the expense disqualifies it entirely.

This is not a rule that exists to catch people out. It’s actually quite fair in principle. The difficulty is applying it consistently to real-world situations where the line between business and personal isn’t always obvious.

A good set of company accounts depends on this being applied correctly from the start — which is why getting the right advice early is so much better than trying to unpick things later.

What Is Clearly Allowable

Some categories of expense are straightforwardly allowable for most limited companies, provided they’re genuinely incurred for business purposes:

Office costs. Rent, rates, utilities, and maintenance for business premises are all allowable. If you run your business from home and have a dedicated office space, you can claim a proportion of household costs — more on that shortly.

Staff costs. Salaries, employer National Insurance, pension contributions, and staff training are all allowable deductions. This includes your own salary as a director-employee. Our article on director pay — salary versus dividends covers how to structure this efficiently.

Professional fees. Accountancy fees, legal fees for business contracts, and similar professional costs are allowable. This includes the fees you pay us to prepare your accounts and tax returns.

Software and subscriptions. Business software, cloud tools, professional memberships, and trade publications relevant to your work are generally allowable.

Travel and subsistence. Business mileage, public transport for business journeys, and accommodation and meals when staying away from home for work purposes are allowable. The key word is business — commuting from home to your regular place of work is not.

Equipment and tools. Laptops, phones, cameras, machinery, and other items used for the business can be claimed — either as an expense in the year of purchase (using the Annual Investment Allowance) or over time through capital allowances.

Marketing and advertising. Website costs, advertising, printed materials, and promotional activities are generally allowable.

Bank charges and interest. Business account charges and interest on business loans are allowable. Personal loan interest is not.

The Grey Areas That Cause the Most Confusion

Working From Home

If you work from home, the company can pay you a contribution towards household costs. HMRC allows a flat-rate claim of £6 per week without requiring supporting evidence — that’s £312 per year, which isn’t much but requires no calculation.

Alternatively, you can work out the actual additional costs attributable to business use — a proportion of heating, electricity, and broadband based on the number of rooms used and hours worked. This can produce a larger claim, but you’ll need to keep records to support it.

One important point: if you own your home and allow the company to use part of it, you need to be careful about how this is structured. Charging the company rent can create tax complications, and in some cases it can affect your Capital Gains Tax position if you sell the property later. It’s worth getting specific advice on this rather than making assumptions.

Mobile Phones

If the company provides you with one mobile phone for business use, that’s fully allowable — even if you use it personally as well. HMRC has a specific exemption for one phone per director or employee. A second handset doesn’t benefit from the same treatment, and laptops or tablets provided for personal use can create a benefit in kind charge.

Staff Entertainment vs Client Entertainment

This is one of the most misunderstood areas of limited company expenses. Staff entertainment — a team Christmas party, for example — is allowable up to £150 per head per year, provided it’s an annual event open to all employees. Go over that threshold and the entire cost becomes a benefit in kind, not just the excess.

Client entertainment, on the other hand, is explicitly disallowed for Corporation Tax purposes. You can put it through the company’s books, but you won’t get a tax deduction for it. HMRC is very clear on this. Lunches with clients, hospitality at sporting events, and similar expenditure may be legitimate business costs in a commercial sense, but they don’t reduce your tax bill.

The Director’s Loan Account

If you take money from the company beyond your salary and declared dividends, it goes through your director’s loan account. An overdrawn loan account isn’t an expense — it’s a debt owed by you to the company. If it remains overdrawn nine months after the company’s year end, the company faces a 33.75% Corporation Tax charge on the balance (under Section 455).

Additionally, if the loan exceeds £10,000 at any point during the year and no interest is charged, there’s a benefit in kind charge to report. Our article on what a director’s loan is and how it works covers this in full — it’s worth understanding before your loan account drifts into territory that creates a tax problem.

Clothing

Clothing is generally not allowable unless it’s a recognisable uniform or protective clothing required for the work. A suit bought for client meetings isn’t allowable, even if you only wear it for work. The HMRC position is that clothing worn to meet the standard of dress expected in business is a personal choice, not a business necessity.

The exception is genuinely branded workwear or safety equipment — high-visibility vests, hard hats, and so on — which are fully allowable.

Training and Development

Training that improves or updates skills you already use in the business is allowable. Training that allows you to enter a new profession or trade generally isn’t. So a digital marketing course for someone already running a marketing business — allowable. The same course for a plumber looking to pivot careers — not allowable.

This distinction isn’t always easy to apply, and HMRC has challenged some claims in this area. The guiding principle is whether the training is directly connected to your existing trade.

Capital Expenditure vs Revenue Expenditure

One distinction that trips a lot of directors up is the difference between capital expenditure and revenue expenditure.

Revenue expenditure — day-to-day running costs like consumables, subscriptions, and small tools — is deducted in the year it’s incurred.

Capital expenditure — assets that will last more than a year, like machinery, vehicles, and computer equipment — is treated differently for tax purposes. Rather than deducting the full cost in one go, you claim capital allowances over time. The Annual Investment Allowance currently lets most businesses deduct up to £1 million of qualifying capital expenditure in the year of purchase, which covers the vast majority of small business investment.

Mixing up these two categories — for example, expensing a significant equipment purchase as a revenue cost — leads to errors in your accounts that need correcting. This is one of the most common issues flagged in our article on mistakes that cost limited companies money at year end.

VAT on Expenses

If your company is VAT-registered, you can generally reclaim the VAT on allowable business expenses — provided you have a valid VAT receipt and the purchase relates to your VAT-taxable activities.

A few areas where VAT reclaim is restricted:

Cars. VAT on the purchase of a car is blocked unless it’s used exclusively for business and not available for private use — which is almost impossible to demonstrate for most director-owned vehicles. VAT on commercial vehicles (vans, for example) is generally reclaimable.

Business entertaining. As with Corporation Tax, VAT on client entertaining is blocked.

Personal expenses. If the expense itself isn’t allowable, neither is the VAT on it.

Getting the VAT treatment of expenses right is just as important as the Corporation Tax treatment. Our VAT returns service includes a review of your input VAT claims to make sure you’re reclaiming what you’re entitled to — and not overclaiming in areas that could attract HMRC attention.

What Causes Problems With HMRC

HMRC doesn’t audit every small company every year — but it does run risk-based checks, and certain patterns attract attention. The things most likely to flag a concern include:

Expenses that are high relative to turnover. If your expense ratio looks unusual for your industry, it can prompt questions. This doesn’t mean you can’t have high costs — just that you need to be able to explain and evidence them.

Personal expenditure running through the company. Holidays, personal shopping, home improvements — these are the kinds of things that cause serious problems if they show up in a company’s accounts. The fact that a payment went through the company’s bank account doesn’t make it a business expense.

Inconsistent treatment. Claiming the same type of cost as an expense in some years but not others — or applying different VAT treatment to similar transactions — raises questions about whether the books are being kept correctly.

Missing or inadequate records. HMRC can disallow expenses for which you don’t have adequate supporting documentation. Receipts, invoices, and bank records should be kept for at least six years.

Good bookkeeping services for small businesses are your first line of defence here. Keeping clean, contemporaneous records — rather than reconstructing expenses from memory at year end — means your claims are supportable and your accounts are accurate.

Our post on how an accountant helps during an HMRC enquiry gives a clear picture of what’s involved if HMRC does open an investigation — and why having proper records and professional representation makes a significant difference.

Expenses for Contractors and IR35

If you operate through a limited company and your work falls within IR35 — the off-payroll working rules — the treatment of expenses changes significantly. Inside IR35, most expenses that you’d normally claim through the company are no longer allowable, because HMRC treats you as a deemed employee rather than a business owner.

This is a complex area, and getting your IR35 status wrong — in either direction — can be costly. Our contractors page covers how we support people working through personal service companies, and it’s worth reading if you’re uncertain about your status.

How to Keep Your Expenses in Order Day to Day

The best approach to expenses isn’t a once-a-year exercise — it’s an ongoing habit. A few practical things that make a real difference:

Keep all receipts at the time. Most cloud accounting apps let you photograph receipts on your phone and log them immediately. Getting into this habit means nothing gets lost and you always have the documentation to back up a claim.

Use a dedicated business bank account and card. Running all business transactions through one account and keeping personal spending completely separate makes bookkeeping dramatically simpler and reduces the risk of personal costs accidentally appearing in your company accounts.

Review your expense categories regularly. If you’re using QuickBooks or similar software, your expense reports show you exactly what’s being coded where. A monthly review — even a quick one — catches miscategorised transactions before they accumulate. As Certified QuickBooks ProAdvisors, we configure expense categories for our clients from the outset so that the coding is as accurate as possible from day one.

Flag unusual costs when they arise. If you’re unsure whether something is allowable, ask your accountant at the time rather than hoping for the best. It’s a much easier conversation before the expense is in the accounts than after.

FAQs

Can I claim for a home office if I’m also an employee of my own company?

Yes, in principle. The company can reimburse you for the additional costs of working from home. HMRC’s flat rate of £6 per week is the simplest approach, but you can calculate actual costs if they’re higher. Keep records of your calculations.

Is it better to claim mileage or put the car through the company?

It depends on the car. For most small companies, claiming HMRC’s approved mileage rates (45p per mile for the first 10,000 miles, 25p thereafter) is simpler and often more tax-efficient, particularly for lower-mileage drivers. Putting the car through the company makes sense in some situations — especially for electric vehicles — but the tax treatment is more complex and needs to be modelled properly for your situation.

Can I put my spouse’s salary through the company?

Yes, if your spouse genuinely works in the business. Their salary must reflect the work actually done and be commercially reasonable — you can’t pay someone £50,000 for a few hours of admin work a week and expect HMRC to accept it. A genuine role at a genuine market rate is perfectly acceptable and can be tax-efficient.

What happens if I accidentally claim a personal expense?

If it’s spotted during an accountant’s review, it can simply be corrected — coded back out of the accounts and treated as a director’s loan if the money was already paid out. If HMRC spots it during an enquiry, the expense will be disallowed and you may face additional tax plus interest. The sooner it’s corrected, the better.

Can the company pay for my pension?

Yes — employer pension contributions are an allowable business expense and don’t attract National Insurance for either the company or you personally. This makes pension contributions through the company one of the most tax-efficient ways to extract value from a profitable business. It’s worth discussing with your accountant as part of your wider tax return planning.

Do I need to report all benefits to HMRC even if they’re small?

Yes. Benefits in kind — things of value provided by the company to directors or employees outside of salary — need to be reported on a P11D or via payrolling of benefits. Some items are exempt (like one mobile phone), but the starting assumption should be that a benefit is reportable unless you know specifically that it’s exempt.

Get Your Expenses Right From the Start

Allowable expenses are a legitimate and valuable way to reduce your tax bill. But the detail matters — and getting it wrong in either direction has real consequences.

At Asmat & Co, we review expenses as part of preparing your year-end limited company accounts, and we keep an eye on your records throughout the year so that nothing is miscoded, nothing is missed, and your books are in good shape when filing time arrives.

We also produce monthly management accounts for clients who want ongoing visibility of their financials — our management reporting service means you always know where you stand, not just at year end.

Whether you’re a new director still working out how it all fits together, or an established business owner who wants a second opinion on how you’re managing expenses, we’re happy to help. We work with small businesses and contractors across Slough, Reading, Wednesbury, and beyond — and as trusted accountants in Slough with nearly two decades of experience, there’s very little we haven’t seen.

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