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Disallowable expenditure

Some categories of expenditure are specifically disallowed in calculating profits for corporation tax purposes. However, they may be deducted in working out the accounting profit. As accounting and corporation tax rules are not identical, it is necessary to adjust the accounting profit to add back the disallowable items to arrive at the taxable profit for corporation tax purposes.

One of the main disallowable items is depreciation, which is an accounting concept that must be added back in the corporation tax computation. The tax equivalent of depreciation is capital allowances, which provide relief for capital expenditure. Entertaining, other than staff entertaining, is also disallowed in the corporation tax computation and must be added back. A deduction is also denied for non-trade loans that are written off (such as a director’s loan), illegal payments (such as bribes), and fines for law-breaking, such as for breaching tax or health and safety legislation. However, motoring fines incurred by an employee while on company business can be deducted, but no deduction is allowed for fines received by a director, regardless of if they were received while the director was on company business. Items such as dividends (which are paid from post-tax profits) and the corporation tax paid by the company are not deducted in calculating taxable profits.

Pre-commencement expenses

The company may incur some expenses before it is active for corporation tax purposes in preparing to trade. This may include the buying of initial stock, advertising, hiring staff, preparing the premises, setting up a website, and suchlike. Where expenses are incurred in the seven years prior to the start of trading, relief is given for expenses to the extent that relief would be available if the expenses were incurred while the company was trading, i.e. to the extent that the expenses are revenue in nature and incurred wholly and exclusively for the purposes of the business. The expenses are treated as if they were incurred on the first day of trading, and relief is given in calculating the profits of the first accounting period.