Dual purpose expenses for limited company directors (what HMRC allows)

One of the biggest sources of confusion when it comes to limited company expense claims relates to costs with both business and personal use (i.e, dual purpose costs).

The issue isn’t whether an expense is related to your business; it’s whether a personal usage element exists alongside the business purpose and whether the two can be separated in practice.

What HMRC means by “dual purpose”

The golden rule, as far as HMRC is concerned, is that an expense must be incurred wholly and exclusively for the purposes of the trade in order to be allowable for Corporation Tax.

This principle is set out in the Business Income Manual at BIM37000.

Where an expense has both a business and a personal purpose, HMRC generally treats it as a dual purpose cost.

And then, if the personal element is more than incidental, the expense is normally disallowed in full.

Although this approach may seem counterintuitive, particularly where there is significant business use, HMRC’s view is backed up by long-established case law.

Why dual purpose expenses can cause problems for directors

As a limited company contractor, you might assume that any cost with a clear business element can be apportioned between business and personal use. Unfortunately, this is not always the case.

Unlike sole traders, directors are employees of their own limited companies.

That distinction matters because any personal benefit derived from the expense can trigger a benefit in kind, even when the expense also supports the business.

Common dual purpose expenses and how HMRC views them

Mobile phones

Mobile phones are one of the few areas where HMRC accepts that some private use does not automatically block tax relief. If the contract is in the company’s name, HMRC generally allows the cost even if the phone is also used for personal use.

This treatment is a specific concession rather than a general rule. It does not extend automatically to other mixed-use services.

Read more in our guides to phone and broadband expenses and smartphone expenses.

Broadband and home internet

The tax treatment of broadband expenses can prove more complex than for mobile phones.

If an existing personal broadband connection is used partly for work, HMRC normally treats this as a dual purpose expense, and so the entire cost is disallowed.

However, if the contract is in the company’s name and is used for business purposes, it should normally be a tax-deductible expense.

Use of the home as an office

For obvious reasons, costs such as heating, electricity and council tax almost always have an unavoidable personal element.

Unsurprisingly, HMRC imposes strict restrictions on what you can claim; otherwise, we’d all be offsetting standard household bills against our company tax liability.

Most directors rely on either the flat home office allowance or a proportionate claim based on actual business use.

Find out more in our guides to working from home expenses and charging rent for using a room in your home.

Travel and subsistence

Travel and subsistence costs often appear business-related, but HMRC closely assesses whether the journey has a personal element, such as ordinary commuting.

Where travel is effectively to a permanent workplace, the cost is usually disallowed.

This distinction becomes particularly important for contractors working at the same site for long periods. See our guidance on claiming business travel expenses and the 24-month rule.

Training and education

Training costs can also fall into dual purpose territory. Courses that update or maintain your existing skills are more likely to be allowable, whereas training that creates a new trade or qualification often has a personal element and is disallowed.

Learn more about the distinctions in our guide to claiming training costs via your limited company.

Clothing

Although this is unlikely to apply to most contractors, ordinary clothing worn for work is one of the clearest examples of a dual purpose expense.

Even if the clothing is worn only while working, HMRC considers it to serve an unavoidable personal purpose.

As a result, everyday work clothing is not allowed. Only genuinely protective or specialist clothing is normally permitted.

Read more in our guide to work clothing and allowable expenses.

When apportionment is allowed and when it is not

HMRC will sometimes accept apportionment where the business and personal elements are genuinely separable.

However, this is the exception rather than the rule. Where the personal element is intrinsic to the expense, HMRC will generally disallow the cost in full.

This is why dual purpose expenses are risky to assume and difficult to defend after the fact.

Keep records of all your expenses

You should always keep records and evidence for any expense claims, particularly where there is a mixture of personal and business use.

Upload any receipts, contracts, and notes to your accounting software (e.g. FreeAgent or Xero) so they’re easily accessible.

For more information, read our guide to maintaining accounting records as a company director.

IR35 does not affect dual purpose rules

IR35 does not alter HMRC’s approach to dual purpose expenses.

The underlying rules remain the same. What changes, where IR35 applies, and whether certain expenses can be offset at all are the questions.

This depends on whether your contract work is caught by IR35 and, even if it is, whether your client is a ‘small’ company.

This distinction is covered in our guides to working inside and outside IR35 and umbrella company expenses.

Always check with your accountant before submitting any expense claims you’re unsure about.