Expenses disallowed when calculating trading profits for income tax

EXPENSES MUST BE WHOLLY AND NECESSARILY INCURRED FOR TRADE PURPOSES TO BE TAX-DEDUCTIBLE

Where purchased items have dual personal and business use, the general rule is that they are not an allowable business expense. However some expenses may be split between personal and business use, in which case the business element only is an allowable expense. For example if half the mileage travelled in a car is for business journeys, then one half the cost of travel is an allowable expense, whereas the remainder which represents the cost of personal journeys is not allowed.

Deductions from gross profit for the following expenses are not allowed for tax purposes

• Any depreciation on fixed assets such as vehicles, buildings, equipment etc.
• Improvements to capital assets such as buildings (however repairs are allowable)
• Entertaining customers (entertaining employees is allowed)
• Gifts to customers are disallowed unless
  • they cost less than £50
  • the gift is not food, drink or tobacco
  • the gift carries an advertisement for the business
• NOTE: Gifts to local charities as part of business promotion are allowed

• Charitable donations via GiftAid

  (These are disallowed because the charity recovers basic rate tax on these from HMRC - if you are a higher rate taxpayer, however, your personal tax band limits are extended and a tax refund may be due)

• Donations to national charities not made via GiftAid.

• Donations to political parties
• Legal fees relating to capital items owned by the business (except for fees incurred obtaining loan finance)
• Premiums paid for grants of leases.
• Fines and penalties (except for reimbursement of those incurred by an employee while on duty)
• Private use by the business owner of assets owned by the business e.g. use of property as domestic accommodation or private use of cars (however, use by an employee is allowable and will incur a taxable benefit in kind for the employee)
• Drawings by the owner, including drawings described as interest on capital invested.
• Goods removed by the owner for personal use must be accounted as sales at full selling price
• Any salary paid to members of the owner's family which exceed normal market rates.
• Any item of personal clothing, even if it is worn for business purposes (e.g. a smart suit).
  • However protective clothing is allowed, for example hard hats or steel capped boots used by the owner of a construction business