What Expenses Can a Limited Company Claim? A Director's Guide
A limited company can pay for a cost and still not get full tax relief on it. Whether an expense reduces Corporation Tax depends on whether it passes HMRC's core test, and a handful of everyday business costs are specifically excluded regardless of how genuinely business-related they feel.
The core test: wholly and exclusively
To be deductible for Corporation Tax, a cost generally has to be incurred wholly and exclusively for the purposes of the company's trade. Anything with a significant personal or dual purpose can be restricted or disallowed, even if the company legitimately paid for it.
Costs that are usually allowable
- Staff salaries, employer National Insurance and pension contributions.
- Rent, utilities and running costs for business premises, including a reasonable home-office arrangement.
- Professional fees — accountancy, legal advice, and relevant business insurance.
- Training that maintains or updates skills already needed for the existing trade.
- Business travel and subsistence for trips outside your normal commute.
- Marketing, advertising and website costs.
- Capital allowances or full expensing on qualifying plant, machinery and equipment.
The expense that trips people up: client entertainment
Taking a client out for dinner is a completely normal business activity, and the company can pay for it — but client entertainment is specifically disallowed for Corporation Tax purposes. The company gets no tax relief on the cost, even though it clearly relates to the trade. This surprises many new directors who assume anything with a business justification is automatically deductible.
Staff entertainment: a useful exception
By contrast, an annual staff event such as a Christmas party is allowable up to a set amount per head, provided it is open to all employees and stays within the limit — go over it and the whole amount can become a taxable benefit for staff, not just the excess.
What happens to non-business spending
If a cost genuinely is not for the business — or cannot be evidenced as such — it should not sit in the company's expense accounts at all. Personal spending run through the company typically ends up in the director's loan account, which carries its own tax consequences if it is not repaid within the relevant time limit.
Practical next steps
- Run every claimed cost through the 'wholly and exclusively for the trade' test before posting it to the company accounts.
- Keep receipts and a business reason noted against each expense, not just the bank transaction.
- Separate client entertainment from staff and marketing costs in your bookkeeping, since they are treated very differently for tax.
- Route anything that is not a genuine business expense through the director's loan account rather than disguising it as one.
