Tax and accounting effects of accounting categories for limited companies

This article explains how the options you select when you add or edit a spending category for a UK limited company can affect its tax reporting.

When you add or edit either of the spending categories in FreeAgent ('Admin Expenses' or 'Cost of Sales'), you are required to choose a reporting name for the category and to identify whether the category is allowable for tax. The choices you make have tax and accounting implications for the company.

Reporting name

Choosing a reporting name for a spending category

In FreeAgent, the options you are given in the 'Reporting Name' drop-down menu correspond to the names available from the UK GAAP XBRL and FRS 105 taxonomies. 

Provided you choose the correct reporting name when you add or edit a spending category, all transactions in that category will be labelled correctly in your accounts.

The impact on tax reporting

The reporting name you choose will affect the structure of the 'Income Statement' area of your company’s Final Accounts report in FreeAgent.

Here’s a breakdown of how the reporting names you choose will affect the 'Income Statement' area of your company’s Final Accounts report. 

Other income

If you choose the reporting name 'Gain (loss) from disposal of tangible fixed assets' or 'Gain (loss) on foreign currency transactions', the amounts will be displayed against 'Other income' in the company's Final Accounts report if the balance of all the categories to which you assign these reporting names adds up to a credit balance.

If this is not the case, the amount for categories to which you assign the 'Gain (loss) from disposal of tangible fixed assets' reporting name will be displayed against 'Depreciation and other amounts written off assets'. The amount for categories to which you assign the 'Gain (loss) on foreign currency transactions' will be displayed against 'Other charges'.

Cost of raw materials and consumables

If you choose the reporting name 'Commission payable', 'Material costs' or 'Purchases' for a spending category, the amounts will be displayed against 'Cost of raw materials and consumables' in the company's Final Accounts report.

Staff costs

If you choose any of the following reporting names for a spending category, the amounts will be displayed against 'Staff costs' in the Final Accounts report:

• 'Director pensions, defined contribution scheme'
• 'Directors remuneration'
• 'Employers NI directors'
• 'Employers NI staff'
• 'Staff benefits in kind'
• 'Staff entertaining'
• 'Staff pensions, defined contribution schemes'
• 'Staff training'
• 'Staff welfare'
• 'Wages and salaries'
• 'Subcontractor costs'

Depreciation and other amounts written off assets

If you choose any of the following reporting names for a spending category, the amounts will be displayed against 'Depreciation and other written off assets' in the company's Final Accounts report:

• 'Amortisation of intangible assets'
• 'Depreciation of tangible fixed assets'
• 'Depreciation and other amounts written off assets'

If you choose the reporting name 'Gain (loss) from disposal of tangible fixed assets', the amount will also be displayed against 'Depreciation and other amounts written off assets' if the balance of all the categories to which you assign this reporting name adds up to a debit balance. If this is not the case, the amount for categories to which you assign this reporting name will be displayed against 'Other income'. 

Other charges

If you choose any other reporting name for a spending category, the amount will appear in 'Other charges' in the company's Final Accounts report.

If you choose the reporting name 'Gain (loss) on foreign currency transactions' for a spending category, the amount will appear against 'Other charges' if the balance of all the categories to which you assign this reporting name adds up to a 'debit' balance. If this is not the case, the amount for the categories to which you assign this reporting name will be displayed against 'Other income'. 

Allowable for tax

Marking a spending category as allowable for tax

When you add or edit a spending category, you also need to choose whether or not the category is allowable for tax. This means that you’re allowed to deduct this expense from your company’s income when you come to calculate the profit that the company will pay tax on.

The 'Allowable For Tax' box is ticked by default, so if the category is not allowable for tax you should untick the box. If you’re unsure whether an expense is allowable, check with HMRC or your accountant.

Please note that if you set up an admin expense with one of the following 'Tax Return Box' categories within a limited company account type and untick the ’Allowable for Tax’ box, FreeAgent will prevent you from reclaiming any VAT on any transactions you post to that category, irrespective of the VAT rate selected:

• Advertising and promotional costs (if dated before 1st May 2024)
• Business entertaining

The impact on tax reporting

The option you select affects the way in which FreeAgent calculates your company’s Corporation Tax liability.