Accountancy fees - tax deductible for sole trader
C asked whether they were right in thinking that the accountancy fee for payroll services and producing the annual accounts for a small client were tax deductible, but not the fee for completing and submitting the tax return, in a query dated 23 April 2007. If this is correct, should the fee for preparing the accounts and calculating the tax due be separated from the fee for preparing the tax return?
Steve confirmed that the fee for completing the tax return was deductible in the case of a sole trader. This extra cost would be minimal in the case of a small sole trader.
This subject is addressed in the HMRC Business Income Manual at BIM46450. Strictly speaking the cost of preparing the accounts comes within the ‘wholly and exclusively’ principle, but not the cost of calculating the tax liability. However, following the case of Smith’s Potato Estates Ltd v Bolland 30 TC 267 and the issue by HMRC of Statement of Practice SP16/91 it has been agreed that the practical difficulties of apportioning the two heads of expenditure are not reasonable, so that fees in connection with calculating the tax liability are allowable.
Different considerations apply to the tax return. However, HMRC recognises that the additional costs of preparing a tax return for a small trader are likely to be minimal, and the costs are effectively allowed by concession. There might well be a different outcome if the trader had several other items of income or perhaps a capital gain, and the tax return was more complex.
Both Steve and 'NE Reply' contrasted the situation where the accountant completes the tax return for a company director, the fee for which is paid by the company. Strictly speaking this is not a liability of the company, but a personal liability of the director, and if shown separately in the fee account, the cost of dealing with the tax return should be added back. 'NE Reply' also correctly reminded members that, in these circumstances, the fee for completing the personal tax return should be included on the director’s Form P11D.
In practice accountants often submit an overall fee to a company which includes the preparation of the director’s tax return, but where that element is not disclosed separately on the bill. Strictly speaking and once again there should be an add back and a form P11D entry, but Steve suggests that in such circumstances the cost is allowed as a CT deduction. 'NE Reply' points out that the customs part of HMRC are unhappy about allowing a VAT input deduction for the cost of a director’s tax return shown on an accountant’s fee note.
The strict position must be that personal work for a director is not a CT deduction, is a Form P11D item and the VAT element is disallowable. However, it appears that in practice this still continues to be something of a grey area.
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