Corporation tax deducting expenses: what companies can claim and what HMRC disallows

The new landscape for corporation tax deducting expenses

On 11 November 2025, HMRC published guidance to help companies determine whether they can deduct the costs of running their business, when calculating taxable profits for corporation tax purposes.

The guidance has likely been issued in response to ongoing uncertainty among small companies. Following the publication of data in June 2025, which identified a corporation tax gap of £14.7 billion, HMRC has sought to provide clearer information on allowable and non-allowable expenses in order to improve compliance and accuracy.

A summary of the guidance, together with practical examples, is set out below.

Revenue expenditure for corporation tax deducting expenses

Revenue expenditure refers to the day-to-day running costs of a business. This includes staff wages, the purchase of trading stock, rent of business premises, and other routine operational expenses incurred wholly in the course of trading.

Capital expenditure

Capital expenditure relates to the acquisition or improvement of assets that provide long-term value to the business. This includes the purchase of business premises, as well as plant and machinery used in the business process.

Capital expenditure is not deducted directly from profits for corporation tax purposes. Instead, tax relief is generally given through the capital allowances regime.

Deducting a revenue expense

A revenue expense, also referred to as a business expense, can be fully deducted from a company’s profits for corporation tax purposes provided that two conditions are met.

The expense must not be specifically disallowed by legislation, such as client entertaining costs. In addition, the expense must be incurred wholly and exclusively for the purposes of the company’s trade. This requirement is commonly known as the wholly and exclusively principle.

Common non-allowable expenses for corporation tax

Certain revenue expenses are specifically disallowed when calculating taxable profits. This applies even where they arise during the course of business activities.

Expenses incurred on client entertaining, including meals, drinks and hospitality provided to clients, are not deductible for corporation tax purposes. HMRC treats these costs as entertainment, on the basis that they do not relate directly to the generation of taxable trading income.

Depreciation is also not an allowable deduction for corporation tax. Although depreciation is treated as a revenue expense in a company’s statutory accounts, tax relief for capital assets is provided through capital allowances instead.

Donations to non-approved charities do not qualify for deduction as a revenue expense. Only donations made to UK charities that meet the relevant legislative conditions are allowable for corporation tax purposes.

Fines, penalties and damages

The corporation tax treatment of fines, penalties and damages depends on the nature of the payment and the reason it was incurred.

Where a fine or penalty is charged to punish the company for breaking the law or failing to comply with regulations, it is not allowable for corporation tax purposes. This applies even if the issue arose during trading activity. HMRC does not view these costs as being incurred wholly and exclusively for the purposes of the trade.

Where a payment is made to compensate for damage or loss caused during normal trading operations, the expense may be allowable. In these cases, the cost arises directly from carrying on the business, rather than from a penalty imposed for wrongdoing.

The wholly and exclusively principle

There are three important considerations when applying the wholly and exclusively test to determine whether revenue expenditure is deductible for corporation tax purposes.

The first is sole purpose. If a company incurs an expense solely for the purposes of its trade, profession or vocation, it will generally qualify for tax relief. If a non-trade purpose is identified, the expenditure becomes non-allowable.

The second consideration is incidental benefit. Where an expense is incurred wholly and exclusively for the purposes of the trade, the existence of an incidental benefit does not, in itself, prevent the cost from being deductible.

The final issue concerns apportionment and duality. Where a clearly identifiable part of an expense is incurred wholly and exclusively for the purposes of the trade, that proportion may be deducted. However, where an expense has been incurred for a dual purpose and cannot be separated, the entire amount must be disallowed.

Why accurate expense classification matters for corporation tax deducting expenses

Correctly identifying allowable and non-allowable expenses is critical to accurate corporation tax reporting. Errors in expense classification can result in understated tax liabilities, increased scrutiny from HMRC, and potential penalties or interest charges.

The updated guidance reinforces the importance of applying established tax principles consistently, particularly for small companies that may lack in-house tax expertise. Careful review of expenses, supported by clear records and professional advice where appropriate, can help businesses remain compliant while ensuring that all available reliefs are correctly claimed.

Businesses can find further detail in HMRC’s published guidance on company expenses deductible before paying corporation tax, available on the GOV.UK website.

How Rayner Essex LLP can help

Understanding which expenses are deductible for corporation tax purposes can be complex, particularly as HMRC guidance continues to evolve. Misclassification of costs can lead to unexpected tax liabilities, compliance issues, and unnecessary risk for business owners.

Rayner Essex works closely with owner-managed businesses and growing companies to ensure corporation tax returns are prepared accurately and efficiently. Our team provides clear advice on allowable expenses, capital allowances, and the application of the wholly and exclusively principle, helping clients remain compliant while claiming all available reliefs.

If you would like tailored advice on corporation tax deducting expenses or support with your company’s tax compliance, get in touch with Rayner Essex to speak to a specialist tax adviser.

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