While allowable expenses reduce your corporation tax liability, it’s just as important to know what you cannot claim. Claiming disallowable expenses can trigger penalties and interest from HMRC, so it’s crucial to get this right.
Common Disallowable Expenses
Here are some typical expenses that cannot be claimed:
• Personal Expenses: Any cost that isn’t entirely for business purposes.
Example: Paying for your personal internet or a family holiday cannot be claimed.*
• Entertainment Costs: Staff entertainment is usually allowable, but client entertainment often isn’t.
Example: Taking a client to a fancy dinner—this cannot be claimed as an allowable expense.*
• Fines and Penalties: Speeding tickets, late payment fines, and other penalties.
Example: A £100 late filing penalty cannot reduce your corporation tax.*
• Capital Expenditures: Buying assets like machinery or vehicles isn’t an expense—these are capital costs (though you may claim capital allowances instead).
• Non-business Gifts: Gifts given without a clear business purpose.
Why Disallowable Expenses Matter
Claiming disallowable expenses can lead to:
• HMRC investigations or audits
• Penalties and interest
• Reputation risk
It’s much safer to exclude questionable costs than risk a fine.
How to Avoid Mistakes
1. Separate personal and business expenses: Keep separate bank accounts or credit cards.
2. Check before claiming: If in doubt, don’t claim it. You can always ask your accountant.
3. Keep thorough records: Even for allowable expenses, documentation is key—especially if HMRC asks for proof.
Mini example:
• Business profit: £60,000
• Claimed disallowable expense: £500 (personal internet)
• If HMRC challenges it, your taxable profit increases to £60,500, and you may owe extra tax plus interest.
Takeaway:
Knowing what not to claim is just as important as knowing what you can. By avoiding disallowable expenses and keeping accurate records, you reduce the risk of HMRC penalties and ensure your corporation tax filings are compliant and stress-free.
Set Yourself up for Success
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