Disallowable expenses for corporation tax are costs that appear in your company’s accounts but cannot be deducted when you calculate the tax due. HMRC works from adjusted profit, not the figure at the bottom of your profit and loss statement, so certain items have to be added back before the rate is applied. With the main rate at 25% on profits above £250,000 and a small profits rate of 19% below £50,000, missing an add-back can mean underpaying tax and picking up a penalty on top.
The categories below cover the items that most commonly need adjusting.
Depreciation and Capital Spending
Depreciation is the single most common disallowable item. If your accounts show £20,000 of depreciation on machinery this year, HMRC ignores that figure entirely. Tax law separates day-to-day running costs (revenue expenditure, which is deductible) from spending on long-term assets (capital expenditure, which is not). The cost of buying equipment, vehicles, or property does not reach your tax computation through accounting depreciation.
Instead, HMRC replaces depreciation with capital allowances under the Capital Allowances Act 2001. In practice this means you add back all depreciation, then claim capital allowances separately. The reliefs are often more generous than the depreciation they replace. Full expensing gives a 100% first-year deduction on qualifying new plant and machinery and was made permanent from April 2023.1GOV.UK. Capital Allowances: Permanent Full Expensing for Companies Investing in Plant and Machinery Special rate assets such as integral features and long-life equipment get a 50% first-year allowance. The Annual Investment Allowance covers up to £1,000,000 of qualifying expenditure per year at 100%, which absorbs most small and mid-sized company spending.2Legislation.gov.uk. Finance (No. 2) Act 2023 – Capital Allowances
Business Entertainment and Gifts
Section 1298 of the Corporation Tax Act 2009 blocks deductions for business entertainment. Meals, drinks, event tickets, hotel stays, and any other hospitality provided to clients, suppliers, or potential customers are all disallowed. Assets used mainly for entertaining, such as corporate hospitality boxes, do not qualify for capital allowances either.3Legislation.gov.uk. Corporation Tax Act 2009 – Section 12984GOV.UK. Business Income Manual – BIM45000
Staff entertainment is the exception. A Christmas party or team event for employees is generally deductible. As soon as clients or suppliers are added to the guest list, that part of the cost becomes disallowable, and if the event mixes both without a clear split, you can lose the deduction on the whole thing.
Gifts
Gifts are disallowed by default with a narrow carve-out. A gift is deductible only if it costs less than £50 per recipient per year and carries a conspicuous advertisement for your company, such as a branded pen or calendar.5GOV.UK. Business Income Manual – BIM45065 Food, drink, and tobacco are excluded regardless of cost. Client Christmas hampers usually fail both tests: they contain food and drink and rarely carry visible branding.
Fines and Penalties
Fines and penalties for breaking the law are disallowable because they are not incurred wholly and exclusively for the purposes of the trade. This covers parking fines where the company is the registered keeper, penalties for late filing of accounts, and health and safety fines.6GOV.UK. Business Income Manual – BIM42515
There is one nuance on parking fines. If a notice is issued directly to an employee rather than to the company as registered keeper, and the company reimburses the employee, the company may be able to deduct the cost, although the employee will face a benefit-in-kind charge. When the notice goes to the company itself, the deduction is blocked.
Legal fees are not automatically disallowed, but many are. Fees tied to acquiring a capital asset, such as property conveyancing, are capital in nature and cannot be deducted as a trading expense. Fees defending criminal proceedings that end in conviction are also disallowed. Costs for ordinary trade disputes or contract enforcement are usually allowable.
Personal and Dual-Purpose Costs
Section 54 of the Corporation Tax Act 2009 sets the test: no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade.7Legislation.gov.uk. Corporation Tax Act 2009 – Section 54 If a cost has a personal purpose alongside a business one, it is disallowed in full unless the business element can be clearly identified and separated.
Clothing is the classic example. A director’s business suit is disallowed because it also functions as everyday clothing. Protective gear, branded uniforms, and costumes required by a specific trade are different because they serve no real personal use. The burden sits with the company to show the exclusively business purpose.8GOV.UK. Business Income Manual – BIM37035
Commuting between a director’s home and a permanent workplace is disallowed too. Travel to a temporary work location can qualify, but the regular commute is treated as personal. This trips up owner-managed companies where a director splits the week between home and the office: if the office is the company’s permanent base, journeys there are still commuting, however infrequent.
Provisions and Reserves
Accounts often include provisions for expected future costs: warranty claims, potential litigation, restructuring, or doubtful debts. General or broad-brush provisions are disallowable. A bad debt reserve calculated as a flat percentage of total debtors, for instance, is not accepted because it does not relate to specific identified losses.9GOV.UK. Business Income Manual – BIM42701
Specific provisions can be deductible where the company has identified a particular debt or obligation and applied reasonable judgement in line with generally accepted accounting practice. The test is whether the provision reflects a genuine, quantifiable liability. In practice, HMRC expects companies to add back general provisions and claim relief only when a specific cost crystallises or the provision meets the specificity test. A £500,000 general bad debt provision gets added back in full; when a specific debt is later written off, the deduction lands then.
Political Donations and Lobbying
Donations to political parties fail the wholly-and-exclusively test and are disallowed. HMRC treats subscriptions to political parties as being made wholly or partly for non-trade purposes.10GOV.UK. Business Income Manual – BIM47405 The same applies to lobbying expenditure aimed at influencing legislation, even where the legislation directly affects your industry.
Trade association and professional body subscriptions are treated differently. Where a membership genuinely serves the trade, the cost is deductible. The line sits at whether the organisation’s primary purpose is advancing the business interests of its members rather than political activity. A local chamber of commerce subscription typically qualifies; a subscription to a political campaign organisation does not.
Dividends
Dividends are not a business expense at all. They are a distribution of profit that has already been taxed, and no deduction is available when calculating corporation tax.11GOV.UK. Running a Limited Company – Taking Money Out of a Limited Company Salary paid to a director is deducted before arriving at taxable profit; a dividend comes out of after-tax profit and reduces the company’s tax bill by nothing.
Interest Restriction for Larger Groups
Most companies deduct their interest costs without any restriction. Under Part 10 of the Taxation (International and Other Provisions) Act 2010, however, a company’s net interest deductions can be capped at roughly 30% of its taxable earnings. A de minimis exemption removes any group with net interest expense of £2,000,000 or less from the rules entirely.12Legislation.gov.uk. Taxation (International and Other Provisions) Act 2010 – Part 10 For small and mid-sized companies this restriction never bites. For heavily leveraged businesses and multinational groups using intercompany loans, disallowed interest can be substantial, though restricted amounts can generally be carried forward.
The Cost of Getting It Wrong
Misreporting disallowable expenses carries its own penalties under Schedule 24 of the Finance Act 2007. A careless error can attract 30% of the tax underpaid. A deliberate inaccuracy runs from 20% to 70%, and deliberate concealment from 30% to 100%.13GOV.UK. Penalties: An Overview for Agents and Advisers Those percentages apply to the lost revenue, so even a modest misstatement of adjusted profit can turn into a meaningful bill once the corporation tax rate and the penalty rate stack on top of each other. Working through the add-backs carefully at the end of each accounting period is the simplest way to avoid the problem.