Key points
- A company can only deduct costs that are wholly and exclusively for its business. If you cannot show that, the cost is disallowed.
- Personal spending paid by the company is a loan to the director. If it is not repaid within 9 months and 1 day of the year end, the company pays an extra 35.75% tax on it.
- Anything that also benefits you personally, such as beauty treatments or everyday clothes, is not a business cost, however much it helps the business.
- Every payment you receive for work and materials is turnover. In construction, your contractor reports it to HMRC every month.
How HMRC actually sees it
Many small business owners still believe HMRC is only interested in companies with millions in turnover. In practice, HMRC does not need to look at every invoice by hand. It uses data and a risk analysis system called Connect, which brings together information from many sources and looks for figures that do not fit.
- Third-party dataBanks, card payment providers, online platforms, the Land Registry, payroll and CIS returns all report to HMRC. Card payment providers, for example, report how much each business takes by card.
- Comparison with similar businessesYour figures are compared with other businesses in your sector. Unusually high "other expenses" or unusually low margins stand out.
- Cross-checks with your partners' returnsWhat a contractor reports paying you under CIS is matched with the turnover in your own return.
When something does not fit, HMRC opens a compliance check and can formally require documents under Schedule 36 to the Finance Act 2008, including your company bank statements. At that point every line on your company card has to be explained. It is up to you, not HMRC, to show that each cost was wholly and exclusively for the business.
Myth 1 · Retail and consulting
"I pay for everything with the company card, from bread to a sofa. The accountant will explain it"
A director uses the company account for both business and household spending. Over the year, dozens of small receipts from supermarkets build up: toiletries, cleaning products, things for the home. The thinking is that small amounts will not attract attention, or can be passed off as "office supplies".
The reality. Household shopping, without a business office and staff who use it, is personal spending. If it is put through the accounts as an expense, HMRC disallows it. The amount is treated as money the director owes the company: the director's loan account.
A director takes £8,000 of personal spending through the company card in a year. If the loan is still unpaid 9 months and 1 day after the year end, the company pays £2,860 of extra tax (35.75%). The tax is refunded once the loan is repaid, but only nine months after the end of the year in which it is repaid. If the company writes the loan off instead, it is taxed on the director like a dividend.
How we handle it. Small purchases with no clear business purpose go straight to the director's loan account. They never reduce the company's taxable profit, and the director sees the balance every month, so it can be cleared in time, for example against a dividend.
Myth 2 · Beauty industry
"I work in beauty. My face is my business, so injections are an expense"
The owner of a beauty studio, who also works as the specialist, puts injection treatments, skin care and wellness services through the company. Her argument: her appearance is the business's calling card and brings in clients.
The reality. UK tax law has a firm dual purpose rule. Even if looking good helps the business, treatments for your body and health benefit you first as a person. The courts settled this decades ago in a case about a barrister's work clothes: a cost with a personal purpose is not wholly and exclusively for the business. HMRC disallows these costs, and claiming them can be treated as a careless or even deliberate error, with penalties on top of the tax.
How we handle it. These services are paid from the director's own account, from salary or dividends already taken. If the company paid, it goes to the director's loan account without reducing Corporation Tax.
Myth 3 · Construction
"My contractor paid me back for materials. That is not turnover"
A builder working through his own company buys materials for jobs, and the main contractor pays him back. He treats these payments as "just getting my money back" and shows only the net value of his labour as turnover.
The reality. Everything the client pays you for the work, labour and materials together, is gross turnover. The materials are a direct cost of sales. The contractor reports the full amount paid to you to HMRC under the Construction Industry Scheme. When the bank receipts, the CIS reports and your declared turnover do not match, it is an automatic red flag.
Wrong
- Turnover: £30,000 (labour only)
- Materials: not shown
- CIS reports £48,000 paid to you: mismatch
Right
- Turnover: £48,000
- Cost of materials: £18,000, with receipts
- Same profit, and the figures match HMRC's
Profit stays the same, but only the second version survives a check.
Business or personal? Tap a card to check
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Director's loan calculator
Good to know
- The rate is 35.75% for loans made from 6 April 2026, and 33.75% for loans made before.
- The tax is refundable after you repay, but not straight away.
- A loan over £10,000 at any point in the year can also be a taxable benefit for you.
- Repaying just before the deadline and borrowing again straight after does not work: anti-avoidance rules apply.
A clean digital trail: how to keep your company safe
The secret is not to hide expenses, but to build the right digital trail for every payment from day one.
- 1. Keep the money apartA strict line between your own money and the company's accounts. Personal spending from your own card.
- 2. Capture every receipt at onceReceipts and invoices go straight into a cloud system such as Dext or Xero, with each item on a receipt shown separately.
- 3. Check risks before filingEvery doubtful receipt is reviewed before the year-end accounts and returns go to HMRC, not after HMRC asks.
What to prepare before your consultation
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One piece of advice
Do not try to hide expenses and hope nobody asks. Build the right digital trail from the start: keep personal and company money apart, and let us review every doubtful receipt before your accounts are filed. It is much easier than explaining it to HMRC years later.
Test yourself
1. You paid £300 of household shopping with the company card. What is it in the accounts?
Personal spending paid by the company goes to the director's loan account.
2. Your company's year end is 31 March 2026. By when must your director's loan be repaid to avoid the extra tax?
9 months and 1 day after the year end. After that, the extra tax is due.
3. A contractor pays you £10,000 for labour and £4,000 for materials. What is your turnover?
All of it is turnover. The £4,000 of materials is a cost, shown separately.
4. You take a client out for dinner to win a contract. Can the company deduct it?
Business entertainment cannot be deducted for Corporation Tax, even when its purpose is purely business.
Law and sources
- Corporation Tax Act 2009, section 54Expenses must be "wholly and exclusively" for the trade
- HMRC Business Income Manual BIM37000Wholly and exclusively, and dual purpose
- Mallalieu v Drummond [1983] 2 AC 861 (House of Lords)Everyday clothing has a personal purpose, even if worn for work
- Corporation Tax Act 2009, section 1298Business entertainment is not deductible
- Corporation Tax Act 2010, sections 455 and 458Tax on loans to directors, and its refund when repaid
- HMRC: director's loansDeadlines, rates and reporting
- Finance Act 2008, Schedule 36HMRC's power to request documents, including bank statements
- Finance Act 2007, Schedule 24Penalties for careless and deliberate errors in returns
- HMRC: Construction Industry SchemeContractors report what they pay subcontractors every month
This guide explains the rules in general terms as at 4 October 2026. It is not advice for your situation. Rules and rates change.
