What Expenses Are Not Allowed For Corporation Tax?

What Expenses Are Not Allowed For Corporation Tax?

If your expenses are exclusively for business purposes, you can claim it against your income. However, some of the expenses you may not be able to claim as per HMRC rule.
Understanding which expenses are not allowed for corporation tax is vital for any business. Mistakes can lead to inaccurate tax filings and costly penalties. Disallowable expenses are those costs that HMRC does not permit to be deducted from your company’s taxable income. Knowing these rules ensures businesses pay the correct amount of tax.

 

This guide outlines what expenses are disallowed for corporation tax. Being aware of these non-deductible costs is crucial for accurate financial planning and compliance with tax regulations. By keeping informed, businesses can avoid unexpected tax liabilities and maintain a good standing with tax authorities.

Table of Contents

What is corporation tax ?

The estimated tax bill charged based on the taxable earnings of a company by the tax authority (HMRC) is generally know as corporation tax. Corporation tax applies to gains from a variety of activities, including trading, investing, and asset sales. Furthermore, any foreign firm with a UK branch or office must pay corporation tax on its UK profits. Societies and clubs, which are frequently organised to pursue common interests and provide social, cultural, or charity activities, are also liable to corporation tax on the earnings generated by their activities.

Importance of Corporation Tax for Businesses

Paying the correct amount of corporation tax is essential for compliance, avoiding fines, and maintaining a good business reputation. It’s essential to have accurate accounting and a thorough awareness of allowed and disallowed expenses. Non-compliance can lead to HMRC investigations, which are compliance checks conducted by tax inspectors to ensure that the company’s tax filings are accurate. A company’s reputation may suffer, legal problems may arise, and financial penalties may result from non-compliance. Furthermore, efficient financial management and investment planning can be facilitated by a knowledge of tax requirements. HMRC investigations can also lead to significant penalties and interest charges if discrepancies are found, emphasizing the importance of maintaining accurate and honest tax records.

General Principles of Allowable Expenses

Wholly and Exclusively Rule

According to HMRC, for the expenses to be deductible, they must be wholly and exclusively for business needs. This idea serves when determining the allowability of a cost. For example, the personal element of a cost is not deductible if it is spent partially for business and partially for personal purposes.

Necessary Business Expenses

These include costs associated with running the company, such as employee salary, office supplies, and rent. However, not all expenses fall under this threshold. Only those expenses directly related to business operations and required for income generation can be deducted to reduce corporation tax. Personal benefits and luxury items are often not allowed expenses, even if utilised for work purposes.

Expenses Not Allowed for Corporation Tax

List of disallowable expenses for corporation tax UK

1. Entertaining Clients

  • Client Meals and Drinks

Expenses on meals and drinks for clients are considered entertainment and are not deductible. Since they have nothing to do with creating revenue for the company, this also applies to any food or drinks served to clients during business gatherings or meetings. For example, if you take one of your customers out for a dinner, the expenses is not tax deductible.

  • Event Tickets and Hospitality

Expenses for client hospitality or event tickets are not deductible. This covers athletic events, musical performances, and other forms of entertainment. For example, if you purchase a seasonal ticket to one of your clients to watch premier. The expenses is not tax deductible.

2. Fines and Penalties

  • Traffic Offences

Fines for traffic violations incurred by employees during business operations are not allowable expenses. These fines are considered personal responsibilities of the employees, not business-related costs.

  • Regulatory Penalties

Penalties for regulatory non-compliance, such as late filing fees or breaches of laws, are disallowable as they do not contribute to business profitability. These penalties are imposed as a consequence of failing to adhere to legal obligations, and thus, cannot be claimed as business expenses.

3. Personal Expenses

  • Non-Business Related Travel

It is not possible to claim personal travel expenses, even if they have been spent on company visits. This covers travel for leisure purposes as well as excursions combined with work.

  • Personal Clothing

Everyday clothing, even if worn for business purposes, is not deductible unless it is protective clothing. Only uniforms or protective gear necessary for the job can be claimed as business expenses.

4. Capital Expenditures

  • Purchase of Assets

If you purchase an asset like machinery or cars requires depreciation over time; the cost is not instantly deductible. Depreciation reflects the asset’s progressive loss of the value caused by use by distributing the expense over the period of its useful life. You cannot deduct the depreciation value against your income for corporation tax purpose. However, you can claim capital gain tax.

  • Major Repairs and Improvements

Large repairs or enhancements to property are classified as capital investments and depreciated over its lifespan. These expenses are not immediately deductible, but are spread out over several years, similar to asset acquisitions.

5. Charitable Donations

  • Donations to Non-Approved Charities

Only donations to HMRC-approved charities are deductible. Contributions to non-approved charities are disallowable. This ensures that only donations to recognized organizations that comply with specific regulations can be claimed.

Case Studies 

Real-Life Example 1: Entertaining Expenses

A marketing firm spent £500 on a client dinner to discuss future projects. Despite being business-related, this expense was not deductible. This illustrates how entertaining expenses, even when directly related to business discussions, are considered non-deductible under tax laws.

 

Real-Life Example 2: Capital Expenditures

A construction company purchased equipment for £10,000. Instead of a full deduction, they depreciated the cost over the equipment’s useful life, spreading the expense over several years. This demonstrates the treatment of capital expenditures, where costs are allocated over time rather than being fully deductible in the year of purchase.

 

Real-Life Example 3: Donation to political party in the UK

XYZ Ltd made a donation of £5000 to a political party. This expense cannot be claimed as an expense although it was paid from the business bank account.

 

Real-Life Example 3: Gifts

The company director of XYZ Ltd paid £1000 for a holiday package. The director claimed it is a gift from the company as a reward. A Company can offer all of their staff members holiday then it can be allowable expense. As this gift is not offered all of the employees therefore, it cannot be claimed.

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If you require further help you can contact Tax Care for professional tax advisory.

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