If you make a purchase using your own money on behalf of the business, you are able to submit it as a business expense, providing that it is allowable. An allowable expense is wholly and exclusively for the use of the company. This means that the expense can be deducted from the taxable income, on which the company would pay income tax and National Insurance.
If the expense was funded by your personal money, it will be added to the director’s loan account. A director’s loan is when the director has borrowed money from the company, which isn’t through salary or dividends, or when the director has put money into the company. It will record the paying in and borrowing of funds by the director.
If the director’s loan is overdrawn, the director owes money to the company. If the director’s loan is in credit, the director is owed money by the company.
If you would like the company to repay the total owed, you will be required to make a director’s withdrawal. If it is an allowable business expense, the company will benefit from corporation tax relief, resulting in less taxable profits.
What is an allowable expense?
An allowable expense is a cost incurred wholly and exclusively for business use. If the expense has been incurred for dual purpose, both personal and business, the expense will not be allowable and will be subject to tax.
Allowable expenses include:
Accommodation – If you are travelling to a temporary work place, you are able to claim for an overnight stay, including for your evening meal and breakfast. The cost should be of reasonable value, not excessive.
Mileage – Business mileage can be claimed for using AMAP rates, HMRC’s approved mileage allowance payments. You will be required to keep a record of miles driven, date of the journey and location.
Equipment – Essential business equipment is classed as an allowance expense, such as a computer, phone and machinery.
In order to correctly account for expenses, you will be legally required to retain records for a minimum of six years after your returns have been filed. If an investigation is launched by HMRC, you will be required to show your receipts. Online bookkeeping software, such as FreeAgent and Xero allow you to store your receipts digitally, sparing room and saving time physically maintaining the records.
Claiming pre-trading expenses
If you put your own money into the business prior to the formation of the limited company, this can be reclaimed, including tax. It is important that the purchases are wholly for business use and they are legitimate. Once the business has been formed, the expense will be treated as though it was incurred on the first day of trading.
There is a reclamation time frame for set up costs which is as follows:
- 6 month limit to claim for services
- 4 year limit to pay for goods
It is important to note that some goods/services may not charge VAT, such as member organisations or insurance. As the director of the limited company, you will be required to keep receipts, invoices or bank statements in relation to business expenses.
HMRC have strict guidelines around expenses and reclaiming tax when putting money into the business. If your claim is not allowable, you could be subject to an investigation which could result in large fines from HMRC. An accountant is best placed to advice you as legislation may vary for sole traders and limited company directors.
Handpicked Accountants can connect limited company directors and sole traders with a knowledgeable accountant specialising in your field. We have longstanding relationships with reliable accountants from across the country. Get in contact with Handpicked Accountants to find an accountant near you.