In short
- A limited company’s corporation tax is calculated on profit, not on turnover. Anything incurred “wholly and exclusively” for the business is deductible, provided it genuinely exists and is documented.
- Most directors discover their taxable profit after the year end, when it is too late to act. The pre-year-end review does that work six to eight weeks before the accounting period closes.
- Director’s pay, employer pension contributions, equipment, software, training, subcontracting, travel: each item has its own rules and its own timing.
- In certain cases, case by case and under conditions, taxable profit can be brought very low, down to 0 %. That is never a goal in itself: it is the outcome of real, useful, documented expenses.
- What does not work: personal expenses, invoices of convenience, client entertaining, fines. An HMRC enquiry focuses precisely on those.
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Why profit is decided before the year end, not after
A limited company’s calendar is simple: a twelve-month accounting period, accounts to file within nine months of the year end, corporation tax to pay nine months and one day after it. Most directors only look at their profit when the accountant sends the accounts. By then everything is fixed: an expense incurred after the year end belongs to the next period.
The pre-year-end review reverses that logic. Six to eight weeks before the period closes, profit is projected from up-to-date bookkeeping, every cost line is reviewed, and the business identifies what is genuinely needed, not yet incurred, and can legitimately be incurred before the closing date.
The important word is “legitimately”. The point is not to create expenses, but not to miss the ones that exist.
The single rule: wholly and exclusively
UK law comes down to one phrase: an expense is deductible if it is incurred wholly and exclusively for the purposes of the trade. Not “mainly”, not “partly”: wholly and exclusively. A mixed expense, both business and personal, is deductible only for the identifiable business portion, and only where that portion can be isolated objectively.
Three practical consequences:
- The expense must be documented: an invoice in the company’s name, proof of payment, and a business reason that holds up in one sentence.
- It must be proportionate to the activity. A consultant invoicing £80,000 and deducting £40,000 of “travel” draws attention.
- It must be real. An invoice issued by a related company with no service behind it is not an expense, it is a problem.
The items that make the difference
The director’s remuneration
Salary paid to the director is a deductible expense for the company. In return it triggers contributions and personal tax where the director resides. The right level depends on tax residence and the applicable contributions, and is decided together with the salary and dividend mix, which we cover in a dedicated article.
Employer pension contributions
This is often the most powerful and least used lever. A contribution paid by the company into a pension scheme for the director is deductible for the company, within an annual allowance, and is not taxed as salary when paid. For a non-resident director, access to a UK scheme and the treatment of the pension in the country of residence must be checked before committing: it is a point to examine, not a reflex.
Equipment
Computer, screens, phone, office furniture: equipment bought for the business qualifies for an immediate deduction within an annual limit that is more than enough for a small company. A replacement planned for January can, if genuinely needed, be incurred in December.
Software, subscriptions and training
Tools used to produce, sell or administer are deductible. Annual subscriptions paid in advance are spread over their term. Training is deductible where it maintains or deepens a skill already used in the business, less clearly where it opens up a new one.
Subcontracting and professional fees
Services bought from third parties (developer, writer, accountant, lawyer) are deductible against invoices. Subcontracting to a related person is accepted if the service exists, is invoiced at market price and is documented like any other.
Travel and home office
Business travel is deductible against receipts. Using a home office gives a right either to a modest flat rate or to a share of actual costs calculated on an objective basis. Daily meals, on the other hand, remain personal.
Two rules on timing
First, an expense belongs to the period in which it is incurred, not the one in which it is paid: a supplier invoice dated 20 December and settled in January sits in the December accounts. Second, an asset bought in the last week of the period still qualifies for the immediate deduction in full, provided it is in use for the business. Those two rules are what make the review effective, and they are also the ones an enquiry checks first: back-dated invoices and equipment that never left its box are easy to spot.
What does not work, and what costs the most
- Client entertaining. Unlike France, the United Kingdom does not allow it as a deduction, even when documented.
- Personal expenses dressed up as business ones. Clothes, sport, trips with a two-hour meeting in the middle.
- Fines and penalties, whatever their origin.
- Invoices with no substance. This is the point at which an enquiry turns from a simple adjustment into an allegation of fraud.
A disallowed expense is added back to profit, with interest and penalties. A fictitious expense engages the director’s personal liability.
A worked example, step by step
A consulting limited company with a 31 December year end. On 1 November, projected profit before remuneration is £90,000. The director is not UK resident.
- Remuneration. A salary of £12,000 is set for the period, consistent with the director’s tax residence. Projected profit: £78,000.
- Pension. After checking scheme access and the treatment in the country of residence, the company pays an employer contribution of £20,000. Projected profit: £58,000.
- Equipment. The workstation replacement planned for the spring is genuinely needed and incurred in December: £3,500. Profit: £54,500.
- Subcontracting and tools. A development project already commissioned is delivered and invoiced before the year end (£6,000), and two annual subscriptions are accrued (£1,500 share). Profit: £47,000.
- Result. Corporation tax at 19 % on £47,000, so £8,930, against roughly £17,100 without the review. The gap is not a trick: these are expenses the company would have incurred anyway, simply at the right time and properly documented.
Bringing profit down to zero only happens when real expenses match the result, typically an investment or launch year. In other cases the aim is a fair profit, not a nil one. Our plans include this review every year.
How the review actually runs
- Week 1: bookkeeping brought up to date, profit projected to the year end.
- Week 2: each cost line reviewed with the director, list of necessary expenses not yet incurred.
- Weeks 3 to 6: commitment, invoicing and payment before the closing date, documents filed.
- After the year end: accounts prepared by the partner accounting firm, CT600 filed, tax paid on the due date.
Frequently asked questions
Can corporation tax really reach 0 %?
In certain cases, case by case and under conditions: when real, necessary expenses absorb the profit. That is common in the first year and rare afterwards. Aiming for zero at any cost is the surest way to create indefensible expenses.
Does an expense incurred on the last day of the period count?
Yes, if it is genuinely incurred on that date, meaning ordered and due, and it meets the wholly and exclusively rule. Payment can follow later; the commitment cannot.
Do I need to keep the receipts?
For six years after the end of the accounting period. An expense without evidence is a disallowed expense in the event of an enquiry.
Does this review replace the accountant?
No. It prepares their work. The accounts, the return and any opinions remain produced by the partner firm, under its professional responsibility.
Is a large purchase in the last month suspicious in itself?
No, as long as it is genuinely used by the business and would have been bought anyway. What raises questions is a purchase with no obvious use, or one resold shortly after the year end.
What if my year end has already passed?
Then only the normal recording of what was incurred remains. The review applies to the current period only, which is exactly why it needs a fixed place in the diary.
What to take away
A limited company’s corporation tax is not a fate calculated after the event. It is managed before the year end, with real, necessary, documented expenses. That is less spectacular than a promise of 0 %, and it is what stands up in front of HMRC.
To go further: how a UK limited company is taxed and its real cost.
