HMRC says my expenses aren't allowable, what can I do?

HMRC disallows a corporation tax expense when it isn't satisfied the cost meets the wholly and exclusively test in section 54 Corporation Tax Act 2009. That means the expense must have been incurred purely for the purposes of the trade, with no significant personal or non-business element.

Common disputes involve travel and subsistence, motor expenses, entertaining, and costs that benefit the director personally as well as the business, such as home office costs or mixed-use equipment. HMRC also frequently disallows capital items claimed as revenue expenses, since capital expenditure needs to be treated separately, usually through capital allowances rather than as a straightforward deduction.

Sometimes the issue isn't the nature of the cost but the evidence for it. Missing invoices, expenses claimed in round numbers, or costs that don't tie back to any identifiable business activity all make it harder to demonstrate the statutory test is met, even where the underlying spend was genuinely for the business.

If you believe HMRC's disallowance is wrong, the first step is to put together clear evidence: the invoice or receipt, an explanation of the business purpose, and, where relevant, something showing how the cost relates to the company's activities, such as a client name, project reference, or diary entry.

HMRC caseworkers will usually reconsider a proposed disallowance if you can show a genuine business purpose that wasn't apparent from the figures alone. Where the expense genuinely had a mixed purpose, it's worth proposing a reasonable apportionment rather than insisting on a full deduction, since HMRC is often willing to accept a fair split supported by a sensible method.

If, after that discussion, HMRC still disagrees and issues a formal amendment or assessment, you have the right to appeal, either through HMRC's internal statutory review or directly to the First-tier Tribunal, within the appeal window that applies to the decision.

If, on reflection, the expense genuinely doesn't meet the wholly and exclusively test, it's usually better to accept the adjustment and correct the return than to contest a weak point, since disputing a clearly non-deductible cost can affect how HMRC views the credibility of the rest of your explanations.

Accepting a reasonable adjustment early, particularly where you've cooperated and explained the position honestly, also tends to support a lower penalty under Schedule 24 Finance Act 2007, since the legislation rewards prompt, unprompted correction of errors.

A disallowed expense means additional corporation tax on the amount disallowed, plus interest from the original due date. If HMRC treats the claim as careless or deliberate, a percentage-based penalty under Schedule 24 Finance Act 2007 can follow, though it's reduced significantly for early, cooperative disclosure.

If several years of similar expenses are affected, the cumulative cost can be considerably higher than a single year's adjustment suggests, which is why it's worth reviewing the same expense category across all open years, not just the one HMRC first queried.

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