Expenditure is generally allowable if it is incurred wholly and exclusively for the

purposes of the trade.

Capital expenditure, appropriation of profit, general provisions, non-trade debts, most
entertaining and gifts, and fine and penalties are disallowable.
Some expenditure is specifically allowable such as legal costs on the renewal of a short
lease.
Leasing costs on cars with high emissions are restricted.

Capital expenditure
Capital expenditure is disallowable, however repairs (returning asset to its original
condition) and maintenance (e.g. redecoration) are allowable. Depreciation is also
disallowable as are any (profits/losses on the sale of fixed assets, thus for tax purposes
they are (deducted)/added back to net profit in the accounts.

General provisions
I.e. general provision for bad debt or stock.
The creation of, or increase in, a general provision is disallowable and must be added back
to the accounting profit. Conversely, a decrease must be deducted from accounting profit.
The creation of, increase in a specific provision e.g. relating to a specific debt is allowable
and requires no adjustment.

Bad debts
Trade bad debts are allowable however, non-trade bad debts are disallowable. This would
include loans to employees unless either made in the course of trade or if the write off is
taxable as employment income for the employee.

Entertainment and gifts

Gifts to employees are allowable. Gifts to customers are only allowable if:

they cost less than 50 per person per year

the gift is not food, drink, tobacco or vouchers exchangeable for goods or services
the gift carries a conspicuous advertisement for the business.

Donations and subscriptions

Trade or professional association subscriptions are allowable.
Charitable donations (not made under gift aid) are allowable:
-

if it is wholly and exclusively for trading purposes (e.g. promotion business name),
and it is to a local charity then it is allowable
national charity/political donations are not allowable

Any charitable donations made within the Gift Aid Scheme are given tax relief in the
income tax computation by extending the tax papers basic rate band. To ensure that tax
relief is not given for these donations twice, any donations made with a Gift Aid
declaration are disallowed in arriving at trading profits and must be added back to net
profit.

Fines and penalties

Disallowed unless the fine is paid on behalf of an employee and incurred whilst on business
e.g. employee parking.

Interest
Interest paid on overdue tax is not deductible and interest received on overpaid tax is not
taxable.
Interest paid on money borrowed for business purposes is allowable.

Legal and professional fees

Allowable if connected with trade and are not related to capital items. Specifically
allowed by statute
- costs of obtaining loan finance
- cost of renewing a short lease (50 years or less)
- cost of defending title to an asset (patent/copyright)

Irrecoverable VAT
Irrecoverable VAT is allowable for trading purposes only if the item of expenditure to
which it relates is allowable.

Employment patents and pensions

Earnings paid to employees are generally allowable. If earnings are charged in the
accounts but not paid within nine months of the end of the period of account, the cost is
only allowable in the period in which the earnings are paid.
Redundancy payments and compensation for loss of office are generally allowable.
However, on the cessation of trade, the deduction is restricted to additional payments of
up to three times the amount of statutory redundancy pay.
The cost of education courses for employees is allowed if incurred for trade purposes.
Employers contributions to a registered pension scheme are allowable in the accounting
period of payment, not when accrued.
Payments of employers national insurance contributions in respect of employees are
allowable.

Car leasing and rental costs

In principle, the costs of hiring, leasing or renting plant and equipment are allowable.
However for leases taken out on cars (not motorcycles) a flat rate disallowance of 15% of
the lease payments applies for cars with CO2 emissions above 160g/km for leases take out
prior to 6 April 2013 (1 April for companies) and for cars with CO2 emissions above
130g/km for leases taken out on or after 6 April 2013 (1 April for companies). Thus from 6
April 2013 there is no disallowance if CO2 emissions are less than or equal to 130g/km.
If the sole trader or partner then uses the leased car partly for business and partly for
private purposes a further adjustment would be required to disallow the private usage of
the leased car.