What expenses are deductible for corporation tax?
Answered 11 March 2026
Deductible Expenses for Corporation Tax
This is a broad topic that spans several categories. Here is a structured overview based on the sources retrieved.
What the Law Says
1. Trading Expenses — The Core Rule
The fundamental rule is found in CTA 2009 s.54: in calculating the profits of a trade, no deduction is allowed for:
- expenses not incurred wholly and exclusively for the purposes of the trade, or
- losses not connected with or arising out of the trade.
However, where an expense is incurred for more than one purpose, a deduction may still be made for any identifiable part or proportion that was incurred wholly and exclusively for trade purposes.
Trading profits must be calculated in accordance with generally accepted accounting practice (GAAP), subject to any adjustment required or authorised by law (CTA 2009 s.46).
2. Capital vs. Revenue
Capital expenditure is not allowable as a deduction. The key statutory prohibition is CTA 2009 s.53. Common examples of non-deductible capital items include the cost of setting up an Employee Benefit Trust and depreciation of fixed assets.
3. Business Entertainment & Gifts
Under CTA 2009 s.1298, no deduction is allowed for expenses incurred in providing entertainment or gifts in connection with a business — whether calculated as trading income, property income, or management expenses. "Entertainment" includes hospitality of any kind. Exceptions exist for entertainment provided solely to the company's own employees.
4. Management Expenses of Investment Companies
For a company with investment business, CTA 2009 s.1219 allows expenses of management of the investment business as a deduction from total profits, provided:
- the expenses relate to the making of investments,
- the investments are not held for an unallowable purpose,
- the expenses are not of a capital nature, and
- the expenses are not otherwise deductible from total profits.
5. Pre-Trading Expenses
Under CTA 2009 s.61, relief is available for revenue expenditure incurred within seven years before the commencement of trade, where it would have been deductible had it been incurred after trading commenced. The "wholly and exclusively" test still applies, and no relief is available for capital expenditure.
6. Categories of "Deductible Amount" in Statute
Legislation identifies the following broad categories of deductible amounts for corporation tax purposes:
- Expenses of a trade
- Expenses of a UK or overseas property business
- Management expenses of a company's investment business (CTA 2009 s.1219)
- Non-trading debits under the loan relationships and derivative contracts rules (CTA 2009 Parts 5 & 6)
- Non-trading debits under the intangible fixed assets rules (CTA 2009 Part 8)
HMRC Guidance / Practice
General Principle
HMRC confirms there is no comprehensive list of allowable and disallowable expenditure. In general, revenue expenditure is allowable unless there is a specific statutory prohibition.
What Will NOT Be Deductible
HMRC guidance identifies the following categories of non-deductible expenditure:
| Category | Reason |
|---|---|
| Capital expenditure | Prohibited by CTA 2009 s.53 |
| Revenue expenditure for non-business purposes | Fails the "wholly and exclusively" test (s.54) |
| Expenditure earning income of another period | Timing rules |
| Expenditure relating to non-trading income sources (e.g. sub-let rents) | Wrong source |
| Specifically disallowed items (e.g. entertainment) | CTA 2009 s.1298 |
Apportionment
Where an expense has a dual purpose, HMRC will allow the identifiable trade proportion rather than disallowing the whole amount — for example, the business-use proportion of a car's running costs.
Specific Examples of Allowable Deductions
HMRC guidance confirms the following are deductible for corporation tax:
- Amounts deductible from taxable rents
- Management expenses of an investment company
- Payments deductible from trading profits (e.g. employee Christmas bonuses)
Loan Relationships, Derivatives & Intangibles
HMRC notes that in the corporation tax field, the regimes for loan relationships, derivative contracts and intangible assets broadly recognise accounting entries for tax purposes, even where they include items of a capital nature — these are governed by their own specific rules outside the general trading income rules.
Important caveat: This is a high-level overview. The deductibility of any specific expense will depend on its precise nature and the applicable statutory rules. Professional advice should be sought for specific situations.
Citation sources
S57 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S61 Corporation Tax Act 2009 (CTA 2009) The above legislation provides relief in respect of certain expenditure of a revenue nature incurred for the purposes of a trade, profession or vocation before it is commenced. The relief extends only to expenditure which: is incurred within a period of seven years prior to the commencement of the trade, profession or vocation, and is not allowable as a deduction in computing the profits of
For unincorporated businesses, the profits of a trade, profession or vocation (see BIM14010) are taxed as trade profits under S5 ITTOIA 2005. The trading profits of companies are taxed under S35 CTA 2009. To calculate those profits you need to determine: whether sums arising are taxable income of the trade, profession or vocation - see BIM15035 the time at which receipts or expenses should be recognised - see BIM31090 onwards, and what deductions are allowable in computing the profits - see BIM4
Under IHTA84/S12 (1) a disposition (IHTM04023) by any person is not a transfer of value (IHTM04024) if it is allowable in computing that person’s profits or gains for income tax or corporation tax purposes, would be so allowable if those profits or gains were sufficient to be so computed. An example is a Christmas bonus paid to employees. A person (IHTM04052) includes a company. So the subsection expressly covers a disposition by a company, etc which is deductible for corporation tax, including,
t’s decision 13. The FTT identified the issues in the appeal, at FTT[9], as follows: The only issue in this appeal is whether the deductions claimed by the Appellants in respect of pension provisions are allowable for tax purposes. That issue is determined by the answers to two questions: (1) were the pension provisions made by the Appellants wholly and exclusively for the purposes of a trade? (2) if so, does section 1290 CTA 2009 apply to disallow the deductions claimed by the Appellants as ded
Capital expenditure is not allowable as a deduction, and capital receipts are not taxable as trade profits. The tax law on trade profits and accountancy principles is not fully aligned on the treatment of capital expenditure. Tax law takes precedence. You therefore need to pay particular attention to those areas where tax and accountancy differ in their treatment of capital expenditure. For a description of the interaction between accountancy and tax on trade profits see BIM31000 onwards. Furthe
Part 20 General calculation rules Chapter 1 Restriction of deductions Business entertainment and gifts Business entertainment and gifts 1298 1 This section applies if a company incurs expenses in providing entertainment or gifts in connection with a business which it carries on. 2 The general rule is that— a no deduction is allowed for the expenses in calculating income from any source for corporation tax purposes, b no deduction is allowed under section 1219 for the expenses, and c expenses to
Business accounts drawn up in accordance with generally accepted accounting practice provide the basis for determining the deductions allowable against trading income, subject to statute and case law. The broad test of whether an expense is deductible is whether it is a proper debit against trade receipts in computing the profits of that trade for that period. Subject to specific statutory provisions, the following will not be deductible: expenditure on capital account, or in connection with cap
were deductible under s189 CTA 2010, finding the payments did not satisfy the necessary conditions so as to make them “qualifying charitable donations”. No appeal is pursued in relation to that conclusion. Statutory framework 29. Section 35 CTA 2009 states that: “The charge to corporation tax on income applies to the profits of the trade”. 30. Section 46(1) provides that: “The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustme
Part 16 Companies with investment business Chapter 2 Management expenses Relief for expenses of management Expenses of management of a company's investment business 1219 1 In calculating the corporation tax to which a company with investment business is liable for an accounting period, expenses of management of the company's investment business which are referable to that period are allowed as a deduction from the company's total profits. 1A A deduction under subsection (1) is to be made before
Guidance on the general application of IHTA84/S12 is at IHTM04191. Broadly a disposition is not a transfer of value if the disposition is allowable for the purposes of calculating the transferor’s Corporation Tax (CT). The words ‘is allowable’ are in the present tense and can only be satisfied where the contribution to the EBT is allowable as a deduction against CT for the tax year in which the contribution is made. A deduction in the CT accounts can be permanently disallowed by the following:
There is nothing in S34(1)(a) ITTOIA 2005 and S54(1)(a) CTA 2009 about apportioning expenditure, for example allowing the ‘trade proportion’ only. On the face of things the statutory test is all or nothing. But you should not interpret S34(1)(a) ITTOIA 2005 and S54(1)(a) CTA 2009 as requiring that the whole of the expenditure be incurred wholly and exclusively for the purposes of the trade, profession or vocation. Where a definite part or proportion of an expense is wholly and exclusively laid o
S33 Income Tax (Trading and Other Income) Act 2005, S53 Corporation Tax Act 2009 The costs of setting up an EBT are capital expenditure and not an allowable deduction in computing taxable trade profits. The existence of an EBT is an asset or advantage of an enduring nature for the company that sets it up. EBTs typically have a life of up to 80 or 125 years, see BIM44501. The capital costs of setting up an EBT include: the initial amount (usually a small amount such as £100) settled by the person
As discussed at BIM30510, the starting point in computing taxable profits is accounts prepared in accordance with generally accepted accounting practice (GAAP). The treatment in the accounts does not, however, determine the question of whether expenditure is capital or revenue. For accountancy purposes the important issue is not whether the expenditure is capital or revenue. For accountants the main question is when expenditure is consumed and, therefore, when it must be charged to the profit an