The majority of companies are required to file a company tax return form CT600 within 12 months of the end its chargeable accounting period. This form records the profits chargeable to corporation tax (PCTCT), which forms the basis of the companies tax charge due to HMRC.
Broadly speaking PCTCT is calculated as the amount of chargeable income received less any business expenses. All companies are entitled to claim the maximum amount of expenses within the ambit of the tax legislation, so it is important that businesses identify all relevant qualifying business expenditure to help minimise their tax liabilities. It is however important to ensure the expenses meet the following basic criterion:
- The expenses must be incurred wholly and exclusively for business purposes.
- Costs which have a dual purpose, for example, the provision of a company car with private use, the benefit-in-kind provisions must be considered.
- It is important that sufficient records are kept/maintained to evidence any expenditure claimed within the accounts. Invoices are the best form of evidence.
“It is important to ensure a correct claim is made from the outset to protect the business position.”
Examples of business expenditure that is specifically disallowed includes (but is not limited too):
- Costs of entertaining customers and suppliers.
- Depreciation on the majority of fixed assets.
- Movement in general provisions (such as bad debts).
Examples of allowable costs include:
- Costs of running an office: phone bills, equipment hire, rent, etcetera.
- Professional subscriptions relating to the company’s trade
- Accountancy fees for preparing accounts and tax computations. Care is needed if such fees are incurred on the capital structure of the business (such as incorporation costs) as these will be deemed capital and not immediately tax-deductible.
- Legal fees for collecting outstanding debts, customer disputes, etcetera. As with accountancy fees, anything of a non-revenue nature (such as legal fees in connection with the acquisition of a property or other asset) will not be tax-deductible through the profit and loss account.
- Salaries and wages, although care is needed with owner-manager salaries as these must be commensurate with the duties performed, otherwise, HMRC can look to disallow any excessive portion.
In the event of an HMRC compliance check any expenses incorrectly claimed by a business will be added back by HMRC, thus increasing the tax payable. It is also possible that HMRC will seek penalties and interest on the underpaid tax, so it is important to ensure a correct claim is made from the outset to protect the business position.