Company records and expenses: build good habits from day one

Separate company records from accounting records

Company records document decisions and information about ownership, officers, capital and the company’s operation. Accounting records explain money received and spent, assets, liabilities and transactions. You need both kinds; a bookkeeping app alone does not hold every corporate decision.

Requirements for particular registers and filings can change. Follow current Companies House guidance rather than relying indefinitely on the starter pack from your incorporation provider. Keep signed agreements, decisions and relevant supporting documents accessible.

Keep evidence with the transaction

Save supplier invoices and receipts as they arrive, along with enough detail to explain the business purpose. For sales, keep issued invoices, credit notes, payment records and any relevant supporting contracts. Bank statements often show a payee and amount, but not what was purchased or why.

If a director pays personally, record whether the company owes reimbursement or whether the payment is being handled another way. Avoid double-counting a personal purchase and its later reimbursement as two separate company expenses.

Do not delete records after a filing

Accounting records generally need to be retained for six years from the end of the company financial year they relate to, and some circumstances require longer retention. Examples can include transactions spanning more than one period, late returns or an HMRC check.

Use a backed-up system with controlled access. If you change accountants or software, make sure you can export and retain usable records. Closing a subscription should not remove the only copy of the company’s financial history.

Business spending is not always an immediate deduction

The tax treatment of spending depends on the nature and purpose of the cost. Some items are routine allowable expenses; assets may need capital treatment; personal, mixed or disallowed costs need separate consideration.

Do not assume every meal, journey or purchase paid by the company is deductible. Keep the purpose, attendees or journey details where relevant, and ask an accountant about uncertain categories. Company and personal benefits can also need payroll or benefit reporting.

Use a short monthly routine

A regular process is easier than an annual clean-up. Reconcile accounts, chase missing evidence, review unpaid invoices and reserve tax. Check the records agree with bank, card and loan balances.

Review ownership or director changes for any separate reporting requirement, and store minutes or resolutions where decisions need them. Give your accountant access on an agreed basis without sharing credentials unnecessarily.

• Capture invoices and receipts weekly.
• Reconcile accounts and loan balances monthly.
• Keep tax reserves visible rather than treating them as spendable cash.
• Review outstanding customer and supplier balances.
• Back up records and test that exports are readable.

Worth knowing: The quality of your records affects the quality of your tax and business decisions.

Build an evidence trail from purchase to accounts

For each sale, retain the invoice, customer information needed for the transaction, payment reference and any credit note. For each purchase, retain the supplier invoice, proof of payment and a description of the business purpose. Match those records to bank entries and reconcile any difference such as fees, partial payments or refunds.

If a director pays a company cost personally, record both the expense and the amount owed to the director. If the company pays for something personal, do not hide it in a general “office costs” category. Its treatment may be remuneration, a benefit, a director loan or another transaction requiring advice.

A digital folder structure can be simple: financial year, month and transaction reference. Use consistent filenames, restrict access and back up outside a single device or subscription. A receipt photograph should remain readable and linked to the relevant entry, rather than sitting among hundreds of unrelated phone images.

• Reconcile accounts monthly, including payment processors and cash.
• Review unpaid invoices, stock and liabilities before estimating distributable profits.
• Keep evidence for decisions and share transactions as well as financial receipts.

Separate record retention from whether an expense is allowable

HMRC generally requires company accounting records for six years from the end of the relevant financial year, with longer retention in specified circumstances, including certain long-running transactions, late returns and enquiries. Other records can have different legal needs. Check the actual rule before deleting a historic folder because its files are six years old.

A cost being paid from the company account does not make it deductible. Mixed private and business use, entertaining, capital expenditure and benefits require their own treatment. Keep enough evidence for an accountant to apply those rules; a bank description saying “travel” does not establish a qualifying business journey.

Use a review queue for uncertain costs rather than inventing tax categories. Ask your accountant which records they need for mileage, homeworking, subscriptions, assets and payroll. Good records reduce guesswork and allow corrections before filing; they do not themselves guarantee a tax deduction.

Managing Your Director's Loan Account (DLA)

A Director's Loan Account (DLA) is not a formal bank account, but an essential record within your company's accounts. It tracks all money that moves between a director and the company, excluding salary, dividends, or reimbursed business expenses. If the company owes the director money (for example, for initial funding), the DLA is in credit. If the director owes the company money (having taken out more than they've put in), it is 'overdrawn'. Each director must have their own separate DLA record. Meticulous tracking is non-negotiable, as an overdrawn DLA can create significant tax liabilities for both the director and the company if not managed correctly within strict deadlines set by HMRC.

The most significant consequence of an overdrawn DLA is the Section 455 tax charge. This is a temporary tax paid by the company, not the director, on the loan balance outstanding at the end of the company's financial year. To avoid this charge, the loan must be repaid in full within nine months and one day of the year-end. If it is not, the company must pay tax on the outstanding amount at a rate equal to the dividend upper rate. This is not a penalty, but a holding tax; the company can reclaim it from HMRC once the director repays the loan. However, the reclaim process is delayed, impacting company cash flow significantly, as the tax cannot be reclaimed until nine months after the end of the accounting period in which the repayment is made.

Beyond the company's s455 charge, there are personal tax implications for the director. If an overdrawn loan exceeds £10,000 at any point during the tax year and is provided interest-free or at a low rate, it is treated as a taxable benefit-in-kind. The value of this benefit is reported on a P11D form, and the company must pay Class 1A National Insurance on it, currently at a rate described by the government. Directors must also be aware of 'bed and breakfasting' anti-avoidance rules. These prevent a director from repaying a loan just before the nine-month deadline and then immediately withdrawing a similar amount, as HMRC would likely disregard the repayment for tax purposes.

Worth knowing: Meticulously track your Director's Loan Account and repay any overdrawn balance within nine months of your year-end to avoid significant, albeit temporary, tax charges for the company.

Choosing a Record-Keeping System: Spreadsheets vs. Software

For a new company, the choice of a record-keeping system usually comes down to two options: manual spreadsheets or dedicated accounting software. The right choice depends on your transaction volume, business complexity, and whether you are registered for VAT. While spreadsheets appear to be the simplest, most cost-effective solution, they are fraught with risk. The potential for data entry errors, broken formulas, and version control issues is high. A simple mistake in a spreadsheet can lead to incorrect financial statements and tax returns, which can be difficult and expensive to unpick later. They are generally only suitable for the very simplest micro-businesses with no employees and turnover well below the VAT threshold of £90,000.

Modern accounting software offers a robust and compliant alternative. These platforms are specifically designed to minimise errors and automate repetitive tasks. Features like automatic bank feeds, invoice generation, and real-time financial reporting provide a clear and current view of your business's health. Crucially, all major software packages are approved for HMRC’s Making Tax Digital (MTD) programme. MTD is already mandatory for keeping digital records and submitting VAT returns for all VAT-registered businesses. With MTD for Corporation Tax on the horizon, choosing compliant software from day one is a forward-thinking decision that future-proofs your business operations and simplifies compliance.

When considering cost, it is vital to look beyond the initial price tag. A spreadsheet might be 'free', but the time you or your accountant spend manually entering data, creating reports, and hunting for errors represents a significant hidden cost. Accounting software subscriptions, typically a monthly fee, should be viewed as an investment in efficiency and accuracy. The time saved on administration can be redirected to growing the business. Furthermore, as your company expands by hiring staff, managing stock, or taking on complex projects, a software system can easily scale with your needs, whereas a spreadsheet system will quickly become a liability.

Worth knowing: While spreadsheets seem free, MTD-compliant accounting software is a crucial investment for most companies to ensure accuracy, save significant time, and meet tax obligations.

The 'Wholly and Exclusively' Test in Practice: What Can You Claim?

The cornerstone for claiming an expense against your company's profit for Corporation Tax purposes is the 'wholly and exclusively' test. This means the entire cost must have been incurred solely for the purpose of the business's trade. If there is a dual purpose to the spending—that is, it serves both a business and a private, personal need—it fails the test, and, in its entirety, is not tax-deductible. For example, the cost of a weekly food shop cannot be claimed, even if some of the food is consumed in the office. This strict rule prevents directors from offsetting personal living costs against company profits. HMRC will scrutinise expenses that appear to have a dual private benefit, so clear justification is vital.

Despite the strictness of the main rule, it is possible to claim for a specific part of a cost, provided that part is attributable 'wholly and exclusively' to the business. This is known as apportionment. A classic example is a mobile phone contract used for both business and personal calls. You cannot claim the entire monthly bill. However, you can review an itemised statement, identify the precise cost of the business calls, and claim that specific amount. This requires diligent record-keeping to prove the business portion to HMRC. The same principle applies to using your home as an office; you can claim a proportion of household running costs (like heat and light), but it must be based on a reasonable calculation, such as the number of rooms used and the amount of time they are used for business activities.

• **Typically Allowable:** Costs like staff salaries, employer National Insurance contributions (currently 15% on earnings above £5,000, though the £10,500 Employment Allowance may apply), rent for dedicated business premises, business insurance, accountancy fees, and direct advertising costs.
• **Typically Disallowable:** The cost of entertaining clients, suppliers, or other business contacts is specifically disallowed for Corporation Tax, even if it has a clear business purpose. Also disallowed are costs of normal commuting to a permanent workplace, fines for illegal acts, and clothing that forms part of an everyday wardrobe.
• **Requires Apportionment or Specific Rules:** For travel in a personal car, you cannot claim running costs like fuel and insurance directly. Instead, you must use HMRC’s approved mileage allowance rates. For a single broadband line used at home, you must make a reasonable apportionment of the business versus private use. For training courses, the cost must be for updating existing skills, not acquiring entirely new ones.

Worth knowing: To deduct an expense for Corporation Tax, its sole purpose must be for business; if a cost has a dual private and business use, you must be able to identify and claim only the specific, evidence-backed business portion.

Capital vs. Revenue Expenditure: A Critical Distinction

Correctly distinguishing between capital and revenue expenditure is a fundamental accounting principle with major implications for your Corporation Tax bill. Revenue expenditure refers to the everyday costs of running your business, such as paying for electricity, buying stationery, or paying salaries. These costs are consumed in the short term, and their benefit is felt within the current accounting period. Consequently, they are fully deductible from your company's income in the year they are incurred, directly reducing the profit on which Corporation Tax (at rates from 19% to 25%) is calculated.

Capital expenditure, by contrast, is money spent on acquiring or significantly improving fixed assets that will benefit the business for more than one year. Examples include purchasing a new delivery van, buying a computer, or constructing an extension to a workshop. You cannot deduct the full cost of these items from your profit in the year of purchase. Instead, the company gets tax relief through a system called Capital Allowances. This system allows you to write off a portion of the asset's value against your profits each year, reflecting its depreciation and useful life. The rates and methods for claiming Capital Allowances vary depending on the type of asset.

Misclassifying expenditure is a common error that can lead to incorrect tax payments and potential HMRC penalties. If you mistakenly treat a capital purchase (like a new server) as a revenue expense, you will have understated your profit and underpaid Corporation Tax for that year. Conversely, if you treat a revenue cost (like repairing the server) as a capital item, you will have overstated your profit and paid too much tax. The line can be fine; replacing a few damaged roof tiles is a repair (revenue), but replacing the entire roof with a superior, modern material is an improvement (capital). If in doubt, professional advice is essential.

Worth knowing: Correctly classifying spending as either a short-term 'revenue' expense or a long-term 'capital' asset is critical for calculating the right amount of Corporation Tax each year.

A Step-by-Step Guide to Processing Employee Expenses

A formal, documented process for managing employee expense claims is vital for accurate financial records and tax compliance. The cornerstone of this system is a clear, written expense policy that is available to all staff. This policy should explicitly state which expenses are reclaimable, any financial limits, and the exact evidence required (e.g., itemised VAT receipts). It should also detail the submission and approval workflow. Without a formal policy, a business invites inconsistency, disputes over claims, and a significant risk that HMRC could deem reimbursements to be a form of taxable salary, creating unexpected tax liabilities for both the employee and the company.

It is crucial to understand the difference between a 'reimbursement' and an 'allowance'. A reimbursement is when the company repays an employee the exact amount of money they have spent personally on an approved business expense. This is not taxable income for the employee. In contrast, a round-sum 'allowance' (e.g., £20 per day for lunch, with no receipts required) is not a reimbursement of actual costs. HMRC treats such allowances as earnings, which must be reported through payroll and are subject to PAYE Income Tax and National Insurance. Adhering to a strict reimbursement process based on actual, evidenced costs is the only way to ensure the payments are tax-free.

1. 1

   The company director establishes and communicates a clear, written expense policy detailing allowable costs, limits, and required evidence.

2. 2

   The employee incurs an expense wholly, exclusively, and necessarily for business purposes and obtains a valid, itemised receipt or invoice.

3. 3

   The employee completes a standardised expense claim form, listing each item, its business purpose, date, and amount, and attaches all supporting receipts.

4. 4

   A designated manager or director reviews the claim form, checking it against company policy and verifying the business purpose before signing to approve it.

5. 5

   The approved claim is passed to the bookkeeper or finance function, who records the expense in the correct accounting category and arranges for the exact amount to be repaid to the employee.

6. 6

   All documentation—the signed claim form and all original receipts—are scanned and digitally filed, to be retained for at least six years from the end of the financial year.

Worth knowing: A formal, multi-step process for approving and reimbursing employee expenses based on actual costs and evidence is vital to ensure claims are legitimate and not treated as taxable earnings.

The Financial Consequences of Poor Record-Keeping

Neglecting your duties to keep accurate and timely company records results in direct, escalating financial penalties from government bodies. Companies House operates a strict regime for the late filing of a company's annual accounts. These penalties are automatic and unforgiving. As of October 2026, a private limited company filing its accounts even one day after the deadline will incur a £150 penalty. This increases to £375 for a delay of one to three months, £750 for three to six months, and £1,500 for being over six months late. Crucially, these penalties are doubled if the company also filed its accounts late in the previous year. These are civil penalties against the company, but directors themselves can face prosecution for failure to file accounts.

Penalties from HMRC for issues stemming from poor records are often more severe and are based on behaviour. If an HMRC enquiry finds that your Corporation Tax return is inaccurate, it will levy a penalty based on the amount of tax understated and the reason for the error. A mistake deemed 'careless' can result in a penalty of up to 30% of the extra tax due. If the error is found to be 'deliberate', the penalty can be up to 70%, rising to 100% if it was also concealed. Inadequate records make it nearly impossible to defend your figures during an enquiry, often leading HMRC to assess a higher tax liability based on their own estimates, in addition to interest and penalties on the underpayment.

Worth knowing: Poor records lead directly to automatic penalties, with Companies House fines starting at £150 for being one day late with annual accounts, while HMRC can charge penalties of up to 100% of any tax underpaid due to record-keeping errors.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• GOV.UK: Company and accounting records
• GOV.UK: Business records for Corporation Tax
• GOV.UK: Taking money out

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.