Common questions. We always get asked is: What expenses can I claim through my limited company operating as a Sole Trader What expenses can offset against income in order to get a tax or tax deduction now, this is a very pertinent question and obviously quite an important question for a lot of director shareholders running. Limited companies also Traders but in their companies and the simple answer to it is well, it really does depend like contrary to popular belief. The reason a prescriptive least HMRC issue in terms of what is allowable. And what is this allowable? It’s no such thing. They don’t do that instead. It’s a principles-based system. There is a principle that I actually issue and this is what we go by and by understanding that principle and how we actually are interpreted will give you a better chance of making a more informed decision. Asian at the point of the transaction as to whether you feel a particular expense is more than likely going to be allowable or is there a better chance it’s going to be disallowed for whatever purpose. Now. The first thing we must say to you is please don’t let the text Tail Wag the commercial dog. This is a very important point. Regrettably. We have dealt with people in the past where they’ve actually made a decision just based on tax. They’ve incurred expenses just because they’re going to get a tax deduction.
Before it regardless of whether that product or service was of any use to them whatsoever. The first thing is first you incur an expense for your business. If you feel that expense and that product or service are going to be of use to your business. Is Bernhardt’s business in any way shape or form is going to improve revenue? Is it going to improve efficiency? Is it going to save you time one or maybe it needs to add value to your business and if that is the case, then it’s worth incurring? Regardless of whether you get tax relief or not. The tax relief should be looked at as a bonus pure and simple, however, nonetheless, it’s still worthwhile getting that tax relief. We would all want that and we understand that perfectly and that’s what this video is all about to help explain the principle. This is really about the basics and once we get through the basics, hopefully, we’ll come out the other end in a much better position with a better knowledge to make a more informed. The decision, so let’s jump on. So the first point of clarification is what do we actually mean by claim expenses through my limited company now, unfortunately, we have had people in the past that had misinterpreted this and the way it’s been interpreted is well, if one pound has been spent by your business to incur an expense, then that 1 pound will be reimbursed back to the business or the actual person in question of the Business on a pound for pound basis by somebody now that’s not always the case. There are instances that the former could be true in the sense that you could be reimbursed by your client. For example, certainly for certain agreeable expenses. We’ve seen that and you know, that’s quite common where if you spend a couple of thousand pounds on the travel they willfully reimburse you power per pound. So then you’re getting that money back, but what will never happen is HMRC’s new K will never ever reimburse you fully for your expenses. That just doesn’t happen.
So by the definition of claim expenses through my limited company does not mean you’re going to be a hundred percent reimbursed for your expenses. What it does mean is that you will get tax relief on expenses that have been deemed allowable through your company. Now what I’ve done here is put together an example. Which is two columns here where it’s exactly the same business a very simple example and it ignores the nuances of VAT and other more complex nuances that do exist. But this is just to get the sort of point and a principle across. So here we got the not claimed column and we got the claimed scenario right next to it. So let’s say your company has an income of a hundred thousand pounds in both cases, but in the scenario, there’s been no expense.
Incurred there for nothing, but forward for a tax deduction whereas in the claim column. It’s been twenty thousand pounds physically actually can be incurred so playful and that’s been put forward as tax allowable expenses. So what then happens? Well, let’s calculate the profit. The profit is simple simply income minus expenses. So in the first scenario not playing The Profit we hundred thousand because it’s simply under thousand minus 0 in the second. It’s a hundred thousand minuses 20000 which turns out to be 80,000 pounds. So there’s a profit before tax now important Point your corporation. Acts which at the moment is 19% in the UK and that is useful to 17 percent over the next few years. So it’s a very very favorite kind of tax for UK company owners.
And the basic math is nineteen percent of the profit before tax. So in this scenario, the absolute value is 19,000 pounds. And in this scenario under the claimed its 15,200. So what’s actually happening is by encouraging in claiming the tax-deductible expenses you, your company ends up paying less corporation tax. That’s what happened. So in this scenario, this ends up paying 3,800 pounds less corporation tax than if you didn’t make those hookers and Clean those expenses. Now another way of looking at it is quite simple for those expenses. What’s effectively happen is you obtain a 19 percent discount on them. That’s what’s happened. So if for example, you hadn’t spent 1 pound incurring an expense, which ends up being tax-deductible then in real terms you only paying 81 Pounds for it although physically or electronically, however, you look at the money.
The transaction you are playing that one pound upfront. But later on down the line when you come to pay your corporation tax, you pay 99 Pounds less than if you never incurred a claim for that expense
See that horrifies what it means to claim expenses through my limited company. Let’s go back to the principle that we touched upon earlier on and it’s fairly straightforward in terms of how it reads. So any expense incurred must be wholly and exclusively for the purpose and course of your business. So if you’re going to remember one thing when it comes to business expenses, just please remember that Wholly and exclusively for the purpose of
The course of your business that is what the principle is from HMRC now the difficulty with that is well. How do you define wholly and exclusively for the purpose of the course of your business and it is open to interpretation. We’ve come across many scenarios where it’s a very clear cart that the motivation and the intention were held exclusively for the purpose of the business and other scenarios where it’s very much been, you know, in the balance. Quite subjective and it’s anyone’s argument. It depends on what angle you come in and what side of the toss you really argue. So a very very subjective area, but let me add a bit more flavor to that particular statement HMRC will allow expenses when there is obviously a business purpose motivating the expense and as long as there is no other option for this purpose.
Maybe you know, it’s not worth kind of contesting because it’s Material amount but certainly when you got material amounts, whether it’s accumulated material around or one of ticket item that in the material Mount then you know that contention becomes even more sort of intense. So this is a keyboard because if there is another purpose HMRC will certainly dispute the expense now, let’s just dig in a little bit deeper in terms of obvious and motivating. We going to give you an example here and the example is business travel. So let’s say, For example, you’re a director shareholder of a limited company based in London. You’re actually based in London. And that’s where the company trades that’s when management actually all takes place. You’ve got a client over in Germany. So, you know, you pick up a flyer and you take that flight to Germany because the client wants to meet you. It’s very very clear. They want a meeting. So you have to go to Berlin to have that meeting, what then happens is your book a return flight and more than likely if you know it involves a stay then you’re going to book some accommodation hotel as well. Now clearly we can in this particular example. It’s pretty clear already that there is an obvious business purpose motivating expense for the flights and the accommodation now, let’s just take one step back. Let’s just say that the director shareholder planned a holiday to Germany Berlin for a week and then calls up a client and says, well actually, you know, what? I’m in Berlin, why don’t we just meet up at? Have a general catch-up and the client is like yeah, absolutely great here in There’s no harm in doing that. Now all of a sudden the motivation has changed here. The flights are still going to be booked and the accommodations are going to be booked. But is there an obvious business purpose here? Well, it can be argued by the director shareholder. There is that, however, HMRC could Clearly say well well, you know given the circumstances of how led up you instigated that business meeting and therefore the intent was more personal gratification rather than a business. So there you have Have it there’s where you know the whole you exclusively rule will then sort of come into to test. And the special circumstances where dispensations are given dispensations are very rare. They are giving him very special circumstances that I won’t go into that much. It’s always best to get into the Habit to ensure that you’ve got the right kind of policy or documentation for any expense. Now, it can be impractical sometimes to collect receipts for very small transactions. I mean certainly by the coffee in the morning, you know to 3-pound Coffee to collect receipts and stick them in your pocket on a shoebox.
It’s very impractical and then you know, we’re moving away from that paperless system. What can happen there is certainly if you’re using a cashless system here at the moment. You can use your debit on your credit card contactless. Normally the transaction is enough to support that but certainly, in higher ticket items, you know, if you’re spending on Hardware-software production anything like that, you know, we’ll see some documentation is needed. You must have that otherwise it will get a challenge. Aged, and it comes on to you know, the other point below you cannot claim for something you have not incurred. Now that is really really important because even if you’ve incurred it but you haven’t got the right sort of level of documentation to support it. It could just be a transaction and your bank account but a lot of times if you look at transactions and bank accounts, you know, the description can be absolute gobbledygook. It’s not really clear all the time as to what it pertains to so from HMRC’s point of view. They won’t rely on that always as evidence so always keep your receipts and documentation just in case you are either investigated or challenged on certain items contract isn’t Freelancers. Now, there are some special rules when it comes to expenses for contracts for freelancer-based limited companies.