Disallowable expenses: entertaining, fines and your Corporation Tax

Short version. Some costs are genuine business expenses, but HMRC doesn’t allow them to reduce your Corporation Tax. The most common are client entertaining, and fines or penalties. They stay in your expense figures, because your accounts must show your true costs, and you enter the same total in the Disallowable expenses field in the Tax adjustments section. We then add that amount back when working out your taxable profit. Your accounts stay accurate and your tax is right.

What counts as a disallowable expense?

A disallowable expense is a real cost in your profit and loss account that tax law says cannot be deducted when calculating your Corporation Tax. The common ones for small companies:

• Client entertaining. Meals, drinks, hospitality, event or match tickets for customers, suppliers or other business contacts. Business entertaining is specifically blocked by section 1298 of the Corporation Tax Act 2009, however commercially necessary it was.
• Fines and penalties. Parking fines, HMRC penalties, Companies House late-filing penalties, and similar. Punishments for breaking rules are not deductible.
• Donations that don’t qualify for charity relief. For example donations to organisations that aren’t registered charities. A donation that does qualify is not a disallowable expense: it has its own field and its own box on the return. See the section below.

A related case: qualifying costs from before your company started trading are deductible, not disallowable, and have their own field. Pre-trading costs that do not qualify (company formation fees are the common example) belong here in disallowable expenses when they sit in this year's figures. See claiming pre-trading expenses on your Corporation Tax return.

What is not disallowable (don’t enter these in the field):

• Staff entertaining within the annual-events exemption. For example a staff party costing up to £150 per head per year is a normal deductible cost.
• Ordinary business costs such as travel, subsistence on business trips, marketing, software and insurance. These are deductible and just sit in your expenses as usual.
• Depreciation. It has its own field and is added back automatically, so don’t repeat it here.

See What expenses can my company claim? for the wider picture of allowable costs.

Does this apply to micro companies?

Yes, to every company, whatever its size. “Micro-entity” (FRS 105) is an accounts regime: it changes how your annual accounts are presented, not what’s deductible for tax. Disallowable expenses are a Corporation Tax rule, and it applies equally to a one-person micro company and a large group. Your micro-entity accounts still show the entertaining or fine as a normal expense. Only the tax computation adds it back. There’s no exemption to claim and no option to skip: if your expenses include disallowable costs, they must be added back.

Where to enter them: the £1,000 fine example

Suppose your company paid a £1,000 fine during the year and it’s sitting in your records as an expense. Where does it go in the wizard? In both places:

1. Leave the £1,000 in your expense figures (administrative expenses, or cost of sales if that’s where it belongs). It’s a real cost. Your accounts must show it, or your reported profit would be overstated.
2. Also enter £1,000 in “Disallowable expenses” in the Tax adjustments section. This tells us to add it back when calculating your taxable profit.

Why both? Compare the three ways you could enter it:

• In both (correct): your accounts show the true £1,000 cost, and your taxable profit is £1,000 higher than your accounting profit. That is exactly what HMRC requires. The fine reduces your reported profit but not your tax bill.
• Only in expenses: your accounts are right, but your taxable profit is understated by £1,000. You’d underpay Corporation Tax, which HMRC can charge interest and penalties on.
• Only in Disallowable expenses (removed from your expenses): your accounts overstate your profit by £1,000 and the add-back is applied to a figure that never included the cost. Your taxable profit is overstated and you’d overpay tax.

The same logic applies to entertaining: £800 of client dinners stays in your expenses and goes into Disallowable expenses. Added to the £1,000 fine, you’d enter £1,800 in total. Enter one combined figure for all disallowable costs in the period.

What it does to your tax

Your taxable profit becomes your accounting profit plus the disallowable total, alongside the other tax adjustments like the depreciation add-back and capital allowances. The tax computation we file with HMRC shows this transparently as a line: “Add back: Disallowable expenses”.

For example, with £20,000 accounting profit and £1,000 of disallowables, your taxable profit is £21,000. At the 19% small profits rate that’s £3,990 of Corporation Tax, which is £190 more than if the fine had been deductible. That £190 isn’t optional: leaving disallowables out isn’t a saving, it’s an error in the return. See how Corporation Tax is calculated for the full picture.

Already filed without adding back a disallowable cost? You can correct it. File an amendment.

Donations to charity are different

If your company gave money to a charity on a UK charity register or to a registered community amateur sports club, that is not a disallowable expense when the payment meets the qualifying conditions. It gets its own relief: the payment comes out of your trading profit and is then deducted from your total profits in a separate box on the return, so you still get the benefit.

Enter it in the Charitable donations field, not this one, and leave the payment inside your expense figures as normal. Two things worth knowing. The relief can reduce your profits to nil but no further, so a donation larger than your profits is not carried forward to next year, and the unused part is simply lost. Advertising or another business-related benefit can make a payment sponsorship, while tickets and other benefits can fall within separate statutory value limits. Contact support if the company or anyone connected to it received anything. The full picture, including what qualifies and a worked box 305 example, is in charitable donations and Corporation Tax relief.

If the recipient has no qualifying charity or CASC status, the payment belongs in the disallowable field on this page. Some exempt or excepted charities can be recognised by HMRC without appearing on a public register, so contact support if that applies. HMRC explains the rules in tax when your limited company gives to charity.

This article is general guidance, not tax advice. Whether a specific cost is disallowable can involve judgement (mixed staff-and-client events are a classic example). If you’re unsure, check GOV.UK or speak to an accountant.