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HMRC internal manual

Business Income Manual

Deductions - scope of: summing up

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 capital incomings or disposals (see BIM35000 onwards),
  • revenue expenditure incurred for non-business purposes (BIM42105),
  • expenditure incurred in earning income of another period (for guidance on provisions and the date at which expenditure is allowable, see BIM42200 onwards and BIM34000 onwards),
  • expenditure relating to a source of non-trading income - for example the rent or rates on sub-let premises, see BIM41010,
  • expenditure specifically disallowed - for example entertaining expenses, see BIM45000 onwards.

If an expense is deductible in a computation of trading profits, the allowance may not be forgone in favour of an alternative deduction (see Wilcock v Frigate Investments Ltd [1981] 55TC530). 

A trade receipt may be excluded by specific provision from computations of profit, but related expenses may still be deductible in computing trade profits (see Hughes v Bank of New Zealand Ltd [1938] 21TC472).