1 July 2021 – This post has been updated. You can read the latest version here.
When it comes to calculating your company’s Corporation tax liability, there are certain items of expenditure which can be deducted when calculating taxable profit and other items of expenditure which cannot.
Knowing what your company can and cannot deduct from its profits for tax purposes is important as fundamentally it will reduce the amount of tax payable.
The general rule is that the expense needs to be wholly and exclusive for purposes of the business/ trade:
Staff entertaining is an allowable cost for tax purposes, provided there is no element which relates to client entertainment (see below). There may however be personal tax implications on the employees if the entertaining exceeds £150 (per person, per year) or is not open to all staff members. For example, a Christmas party held for staff would qualify.
Termination / redundancy payments
Certain types of termination / redundancy payments are allowable for tax purposes. However, the rules around this are quite complex, so please contact us if this applies to your business.
Generally speaking, depreciation (mentioned below) is not an allowable expense for tax purposes. Instead capital allowances are deducted from profit to replace the depreciation in the accounts. From the 1st January 2019, HMRC have temporarily increased the annual investment allowance (100% deduction on qualifying expenditure) from £200,000 to £1,000,000 to encourage investment in qualifying business assets such as plant, machinery and office furniture
It’s important to note that the purchase of a company car, will unlikely qualify for the annual investment allowance and that relief will be given at a rate of either 18% or 8% each period, depending on the CO2 emissions.
Wages that are accrued in the accounts (such as a bonus) are allowed a tax deduction so long as the amount is actually paid within 9 months of the year end.
Expenditure on repairs can be deducted from a company’s tax liability provided there is no major enhancement to the item being repaired. For example, restoring a broken machine or redecorating the office.
A provision is included in the financial statements and allowed for tax if the conditions leading to the cost existed at the balance sheet date, it is probable that it will be paid and that a reliable estimate can be made. Any general provision such as a general bad debt provision would not be permitted.
If you write off a customer debt which is no longer recoverable a deduction is allowed for tax. This is only for specific customer debts.
The following expenses are NOT allowed as a Corporation tax deduction:
As mentioned above depreciation is disallowed (as this area of accounts is subject to judgement), capital allowances are allowed as a tax deduction instead.
If you incur expenditure on legal fees relating to capital expenditure, for example on the purchase of an investment property or on advice regarding shares, this expense is disallowed for tax purposes.
Expenditure on clothing is disallowed unless it is uniform which bears the company logo or is protective clothing.
Expenditure incurred on customer or supplier entertaining is not allowed for tax purposes. For example, taking your customer out for a meal.
Business gifts are not allowed for tax purposes unless it costs less than £50, it is neither food nor drink and it bears the business name. For example, stationary bearing the company logo.
Car lease costs
If the car the company is leasing has emissions which are more than 110g/km (for leases entered into after 1 April 2018) then 15% of the lease cost in the profit and loss account is disallowed for tax.
Fines / penalties
Any fines or penalties that the company pays will not receive a tax deduction. For example, a speeding fine.
Accrued pension contributions
Any pension contributions which the company pays during the accounting period is allowable, however if you decide to accrue for any pension contributions that the company pays for after the accounting period has ended, this is disallowed for tax purposes. For example, a company with a December 2018 year end has accrued for £5,000 of pension contributions for one of its Directors. The company pays the £5,000 in March 2019 following the year end. Although the £5,000 would be included as an expense in the 2018 accounts, it would only receive tax relief in the 2019 accounts.
Although a salary is an allowable business expense, dividends are not.
If you have a query relating to an expense which is not listed above or would like to check how something should be treated for tax purposes please do call one of the tax team on 01202 717867 and we will be happy to help.