Which expenses can my company deduct?

• Corporation Tax Act 2009, section 46: the profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for corporation tax purposes.

• Section 54(1): 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 for losses not connected with or arising out of the trade.

• Section 53: no deduction is allowed for items of a capital nature, subject to provision to the contrary in the Corporation Tax Acts.

• HMRC's Business Income Manual (BIM37007): not everything charged in the profit and loss account is an allowable deduction for tax purposes. For example, you add back depreciation when you compute the taxable profits.

SourcesThe law·HMRC

• HMRC's manual (BIM37007): the rule is only satisfied if the taxpayer's sole purpose for incurring the expense is for the purposes of their trade. If a non-trade purpose is identified, the expenditure is not allowable, even if there are also one or more business reasons. Where an expense is incurred wholly and exclusively for the trade, an incidental benefit may arise, and that does not, of itself, mean the expenditure is disallowed.

• BIM37050: establishing purpose means establishing the aims or objectives underlying the expenditure. In Bentleys, Stokes and Lowless v Beeson, the court asked what was the motive or object in the mind of the individuals responsible. HMRC says this points to the mind of the trader.

SourcesHMRC

• Section 54(2): if an expense is incurred for more than one purpose, the section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.

• BIM37600: where a definite part or proportion of an expense is wholly and exclusively for the trade, do not disallow that part on the ground that the expense as a whole is not.

• BIM37007 distinguishes a definite part or proportion spent wholly and exclusively for the trade (not disallowed) from an expense incurred for a dual purpose (disallowed). For classes such as motor expenses and use of home as office, a detailed review for a representative period can establish the deductible proportion, and it is sensible to keep using it until the underlying circumstances change.

SourcesThe law·HMRC

• Section 53 (above) disallows items of a capital nature.

• Capital Allowances Act 2001, section 11: allowances are available if a person carries on a qualifying activity and incurs capital expenditure on plant or machinery wholly or partly for the purposes of that activity, and owns it as a result. GOV.UK: capital allowances let you deduct some or all of the value of an item from your profits before you pay tax.

• HMRC's Capital Allowances Manual (CA21010): computers and similar electronic devices are machinery.

• FRS 105, paragraph 12.17: a micro-entity allocates the depreciable amount of an asset on a systematic basis over its useful life.

• CA20006: depreciation of fixed assets charged in the accounts is not allowed as a deduction in computing taxable profits; capital allowances may be given instead, at prescribed rates. CA10020: capital allowances take the place of depreciation, which is not normally deductible.

• BIM35415: where a tangible asset's life is less than one year, HMRC accepts the expenditure as revenue. The guidance turns on the asset's life and gives no money threshold. Accountancy treatment may be informative but does not decide whether spending is capital (BIM35010).

SourcesThe law·HMRC·GOV.UK·FRC

• BIM47105: if there is no non-trade purpose to the remuneration and the quantum is not determined by the relationship, the payment does not fail the wholly and exclusively test.

• BIM47106: where the controlling director is also the person whose work generates the company's income, the level of the remuneration package is a commercial decision, and a non-trade purpose is unlikely.

• Corporation Tax Act 2009, section 1288: remuneration charged in the accounts but not paid before the end of the 9 months immediately following the end of the period of account is deducted in the period of account in which it is paid. If it is not paid, no deduction is allowed.

• BIM46035: a pension contribution is allowable unless there is a non-trade purpose; where the package looks excessive for the work, the whole package is considered, not only the contribution. Finance Act 2004, section 196: contributions are deductible for the period of account in which they are paid, subject to the spreading rules in sections 197 and 198.

SourcesThe law·HMRC

• BIM47106: remuneration does not include entitlement to dividends arising in the capacity of shareholder.

• Corporation Tax Act 2009, section 1305: no deduction is allowed for a dividend or other distribution in calculating a company's profits, unless the Corporation Tax Acts expressly authorise one.

SourcesThe law·HMRC

• HMRC's Employment Status Manual (ESM2503): a director of a company is an office holder. Income Tax (Earnings and Pensions) Act 2003, section 5: the employment income provisions apply equally to offices, unless otherwise indicated, with "employee" meaning the office-holder.

• Section 319: no income tax arises on the provision of one mobile telephone for an employee without any transfer of property in it. GOV.UK's conditions are one phone or SIM card, and a contract between the employer and the supplier.

• If the employee arranges the phone and the company pays the supplier, the company reports the cost on form P11D and pays Class 1 National Insurance through payroll.

• Section 316A: no income tax arises on an employer's payment for reasonable additional household expenses the employee incurs in carrying out the duties at home under homeworking arrangements. Homeworking arrangements are arrangements between employee and employer under which the employee regularly performs some or all of the duties at home. HMRC's guideline from 6 April 2020 is £6 a week, or £26 a month for monthly paid employees (EIM01476).

• BIM37700: normal employee costs, including directors', are allowable; exceptions include capital costs, dividends and "excessive" remuneration. Our reading: that manual page does not name a phone contract or homeworking payment when dealing with the employer's deduction, so the general test under section 54 applies.

SourcesThe law·HMRC·GOV.UK