As a general rule, a company can deduct expenses that are incurred wholly and exclusively for the purposes of the business and which are revenue in nature, in arriving at its taxable profits. However, there are some items for which a deduction is expressly prohibited for corporation tax purposes, and the accounting profit may need to be adjusted to take account of disallowable items.
Examples of expenditure include the costs of sales which are deducted to arrive at a gross profit. This will include stock movements, purchases, packaging, and distribution. Expenses are deducted from gross profits to arrive at net profit. Examples of allowable expenditure include:
• wages and salary costs;
• employer’s National Insurance;
• accountancy costs;
• office administration costs;
• travelling expenses;
• business rates;
• benefits provided to employees;
• staff entertaining;
• interest and finance costs;
• legal fees;
• stationery; and
The above list is not exhaustive, and the deductible expenses will vary depending on the nature of the business. However, the key tests are whether the expense is revenue in nature and whether the expense is incurred wholly and exclusively for the purposes of the business.