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List of Disallowable Expenses for Corporation Tax in the UK

Understanding What You Can’t Claim as a Business Expense

When preparing your company’s accounts for Corporation Tax in the UK, it’s crucial to distinguish between allowable and disallowable expenses. While allowable costs can reduce your company’s taxable profit, disallowable expenses must be added when calculating the final figure for Corporation Tax purposes.

This article outlines the most common types of disallowable expenses and clarifies how to comply with HMRC guidelines.

What Are Disallowable Expenses?

Disallowable expenses are costs that cannot be deducted from your business income when calculating your Corporation Tax liability. These are typically not incurred “wholly and exclusively” for the trade.

Why It Matters

Including disallowable expenses in your tax return without adjusting for them can lead to:

  • Underpaid tax
  • Penalties from HMRC
  • Incorrect financial reporting

Ensuring these are correctly identified and excluded from your tax computation is essential.

List of Disallowable Expenses for Corporation Tax in the UK

Common Disallowable Expenses

Here’s a breakdown of the most frequently encountered disallowable expenses:

1. Client Entertainment Costs

  • Taking clients out for meals, drinks, events, or hospitality is not tax-deductible, even to discuss business.
  • HMRC distinguishes between staff entertainment (which can be allowable) and client entertainment (which is not).

✅ Allowable alternative: Annual staff events up to £150 per head.

2. Fines and Penalties

  • Any fines imposed by law or government authorities, including:
    • Parking fines (even if incurred during business)
    • HMRC penalties
    • Court fines
  • These are never allowable for Corporation Tax purposes.

3. Political Donations and Lobbying Costs

  • Donations made to political parties or organizations that influence legislation are not allowable.
  • This includes any lobbying activity or campaign contributions.

✅ Allowable alternative: Donations to registered charities (if conditions are met).

4. Capital Expenditure

  • Purchases of fixed assets (e.g., equipment, vehicles, machinery) are not considered allowable as day-to-day expenses.
  • Instead, these should be claimed via capital allowances.

✅ Note: Running costs (e.g., repairs, fuel) for business-use equipment may be allowable.

5. Depreciation and Amortisation

  • Accounting depreciation of fixed assets is not deductible.
  • HMRC does not accept depreciation as a tax-deductible expense.

✅ Allowable alternative: Use capital allowances (such as the Annual Investment Allowance) instead.

6. Drawings or Personal Expenses

  • Any money withdrawn by directors/shareholders for personal use (drawings, private travel, personal shopping) is disallowable.
  • This includes using the company card for non-business-related purchases.

✅ Tip: Keep clear records separating personal and business expenses.

7. Excessive Salaries or Dividends

  • Uncommercial levels of salary or bonuses paid to directors or related parties may be partly disallowed if deemed excessive and not incurred “wholly and exclusively” for business.

✅ Tip: Remuneration should be reasonable and reflect the work carried out.

8. General Provisions

  • General provisions for bad debts, stock obsolescence, or liabilities are not usually allowable unless they relate to specific, identified cases.

✅ Allowable alternative: Specific provisions based on known and quantifiable risks.

9. Legal and Professional Fees (in Certain Cases)

Some legal and professional fees are disallowed, such as:

  • Fees related to the purchase of fixed assets or property
  • Legal fees for defending criminal charges (unless incurred in the course of trade)
  • Costs of setting up the company

✅ Allowable: Legal fees for debt recovery or trade-related disputes.

10. Entertaining Suppliers or Business Contacts

Much like client entertainment, costs incurred while hosting suppliers or partners fall outside the scope of allowable expenses.

Other Commonly Overlooked Disallowable Expenses

ExpenseAllowable?Notes

Gifts to clients ❌ Unless worth under £50, carry the company logo and not food/alcohol

The private portion of travel or motoring costs ❌ Only the business portion is allowable.

Charitable donations to non-registered bodies ❌ Must be to UK-registered charities to qualify.

Costs related to earning non-taxable income ❌ For example, investment management fees where income is tax-exempt

How to Deal with Disallowable Expenses in Your Accounts

  • Step 1: Record all expenses in your accounting system (including disallowable)
  • Step 2: Identify disallowable items during the year-end review
  • Step 3: Add back disallowable expenses in your Corporation Tax computation
  • Step 4: Keep evidence and clear notes for each adjustment in case of an HMRC inquiry

✅ Use accounting software or consult your accountant to ensure accurate handling.

Final Thoughts

Understanding which expenses are disallowable for Corporation Tax purposes is crucial for keeping your company compliant, avoiding penalties, and ensuring accurate financial reporting.

Although it may be tempting to include certain costs, HMRC rules are strict. When in doubt, ask yourself: Was this expense incurred wholly and exclusively for the business? If not, it likely belongs on the disallowable list.

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