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Deductibility of business expenses: an overview

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8th Nov 2012
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Three recent first-tier tribunal cases regarding the deductibility of business expenses have lessons to offer accountants, according to Gabelle.

McLaren Racing Ltd v HMRC, Interfish v HMRC and Grant Bowman v HMRC all related to the extent to which businesses could claim tax relief on different types of payment. HMRC won the latter two, but lost the McLaren case. According to Gabelle, businesses should take note oof the factors on which the cases turned.

Gabelle director Martin Mann said these issues include the exclusivity of the expenditure for the purpose of the trade and whether it was revenue or commercial in nature. 

Here is a summary of the points raised:

Expenditure: Revenue or capital in nature?

In the case of Grant Bowman, the issue in dispute was whether sole practitioner Bowman was allowed to treat a consultancy payment of £11,000 as incurred wholly and exclusively for purposes of the trade. 

The main argument was whether the payment was capital or revenue in nature. If it was capital, as HMRC argued, it was non-deductible. However, the tribunal found the payments had nothing to do with day-to-day running of the business and so confirmed it as capital. 

Mann said businesses need to ask themselves whether their expenditures are revenue or capital in nature. Capital expenditure usually involves the acquisition or creation of an asset of enduring benefit while revenue expenditure reflects more everyday costs. Once established, they can then proceed to the next question: is it wholly and exclusively for the purposes of the trade?

Wholly and exclusively

The Interfish and McLaren decisions turned on this point. The Interfish case dealt with the deductibility of payments made by Interfish to the local rugby club. In short, the tribunal could not see evidence to support the company's claim of obtaining visible promotion and supported HMRC's view that that payments had a dual purpose of gaining publicity for the company, and improving the club's finances.

Mann advised businesses to examine why the expenditure had been incurred and whether it was wholly and exclusively for the purposes of the trade. In situatinos where a dual purpose might arise, companies should consider whether elements can be ringfenced, or clearly identified as business expenditure, to support the case for deductibility.

"Legislation doesn't prohibit the deduction of expenditure from items with a dual purpose used for business and private, for example, a home, as long as the business proportion can be clearly identified or invoiced separately," Mann said. 

McLaren: Lead to similar cases?

The McLaren case arose from the racing team's breach of the FIA International Sporting Code, which resulted in a penalty of £32m. Was the fine tax deductible?

In a split decision the tribunal ruled that the penalty was commercial and that McLaren was obliged to pay it under the contractual terms agreed for purposes of its trade. As a result, the penalty was ruled a deductible, but Mann would not be surprised if the decision was appealed and overturned. 

Mann said the decision brings up the question of deductibility in a way that might affect other professions or businesses suffering regulatory fines: would these be classed as commercial, or in the public interest?

"I would say HMRC would try to close the door firmly on this," he added.

For further analysis of a range of personal and business tax issues, visit the Gabelle page on AccountingWEB.

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By philfromleeds
16th Nov 2012 12:06

International Trading Businesses

I feel HMRC should start disallowing overcharges from a foreign business or subsidiary to the UK Business in respect of goods or services or management charges. They seem to pick on the weak/ small business. It is about time they started employing more staff to protect our Nations Finances. Amazon and Starbucks must be told we do not need you. You need us, that being our custom.

Now Google is an interesting organisation. Due possibly to reasons of security their technical department for a country may be in a different country to that which it serves. The Sales department will be based in the local country. These departments are diffent companies. Tax authorities in different countries must be having a very hard time evaluating the truth which is presented to them. They probably give up thinking that their is a greater good of local employment being created.

 

 

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