Businesses are allowed to deduct administrative expenses when calculating business profits for tax purposes to the extent that the expenses are incurred wholly and exclusively for the purposes of the business. Administration expenses include professional fees and subscriptions, which for some businesses can be a significant expense.
Professional fees may be incurred for a variety of reasons and can include fees charged by accountants, lawyers, architects, consultants to name but a few. In deciding whether it is permissible to deduct professional fees in computing taxable profits it is necessary to establish not only whether the fees were incurred wholly and exclusively for the purposes of the business, but also whether the items to which they relate are capital or revenue in nature.
Capital v revenue business expenses
Relief is only given as a deduction in the computation of profits for items that are revenue in nature and which meet the wholly and exclusively test. Depending on the nature of the item, relief for capital expenditure may be given by the capital allowances system or as a deduction in computing any chargeable gain or allowable loss when the item is sold.
The extent to which a professional fee is capital or revenue depends on the nature of professional services provided. Fees which relate to capital items are deemed to be capital in nature and are not deductible in computing taxable profits. By contrast, fees that relate to revenue items are deductible.
Disallowable expenses
Professional fees are capital in nature to the extent that they are incurred in relation to capital expenditure. For example, fees in relation to the following would be disallowed in computing profits on the grounds that they represent capital rather than revenue expenditure:
- conveyancing fees in relation to the purchase of business premises;
- fees in connection with raising long-term finance;
- fees in connection with changing the structure of a business (for example, incorporating a business or forming or dissolving a partnership);
- fees incurred in connection with pursuing debts of a capital nature;
- fees pursuing claims for capital compensation; and
- fees in connection with the renewal of a long lease.
In some cases, it will not be clear cut whether a professional fee relates to an item which is capital or revenue in nature. This may be the case, for example, in relation to fees for court proceedings, where it is necessary to look at the nature of the proceedings to decide if fees are capital or revenue costs.
Allowable professional expenses
There are many commercial reasons why professional fees may be incurred and in respect of which a deduction against profits is permitted. A prime example is fees incurred for the preparation of accounts, tax computations and returns. However, a deduction is not allowed for the fees associated with dealing with a tax investigation, unless the investigation does not find anything to be wrong.
Personal expenses
Unsurprisingly, a deduction is not given for professional fees that relate to personal items, such as the computation of a personal capital gains tax liability or legal fees relating to the drafting of a will. Where a bill for professional fees covers advice of a both a business and a personal nature, a deduction should only be claimed for that portion of the fee that relates to the business.
Subscription expenses
A deduction may also be claimed for a subscription to a professional body, such as the Institute of Chartered Accountants in England and Wales, the Royal Institute of British Architects, the British Veterinary Association or the Law Society. A list of approved professional bodies can be found on the HMRC website. It is also possible to claim a deduction for the cost of subscribing to a trade journal.
Practical business expense deduction tax tip
A deduction can be claimed against profits for professional fees to the extent that they relate to revenue expenditure and are incurred wholly and exclusively for the purposes of the business.
