Back to basics

With the proverbial dust now beginning to settle after an unpredicted General Election result what does this mean for tax policy? Conservative manifesto pledges did not propose any radical changes in the underlying tax system.  Managing the deficit, with an emphasis on reducing the tax gap, continues to be the key goal.  With tax morality issues still in the public eye, the proliferation of anti-avoidance legislation over the last five years seems set to continue. 

Despite the best efforts of the Office of Tax Simplification there is little evidence of a political will to alter the underlying principles of the UK tax system over the life of the next parliament.  The basic principles for deductibility of business expenses by unincorporated businesses are long-established and there are no proposals for amendment in the foreseeable future.  However those principles are not always so straight forward when applied in practice.  A couple of examples in distinguishing allowable expenditure are covered below.

Sponsorship

Sponsorship expenses will be deductible if the payments are made wholly and exclusively for the purpose of a trade or business. Where the proprietor of a business or a controlling director shareholder has a personal interest in the sponsored organisation then the distinction between the business and personal objectives may be unclear.

The degree of any private purpose is a question of fact. If the commercial benefits and objectives have not been fully documented it may be difficult to demonstrate that there is an exclusive business purpose underlying the sponsorship arrangements, e.g. if there is no formal agreement or no cost/benefit analysis has been prepared to justify the effectiveness of the expenditure compared to other types of advertising.

However expenditure will not fail the duality of purpose test solely on the grounds that the sponsors receive a personal benefit if this is incidental to the overall business purpose.

Sponsorship expenditure may have a dual purpose where some or all of the following are evident:

  • There is another connection between the sponsor and recipient, e.g. the proprietor of the sponsor is also a trustee or official of the recipient sports club.
  • The commercial rationale underlying the benefits to the sponsor and connection with its potential customers is unclear, e.g. an international recruitment agency sponsors a local equestrian business operated by a close relative of the sponsor (Executive Network v O’Connor [1996] STC (SCD) 29).
  • The amount of the sponsorship is not commensurate with the level of advertising and publicity that could have been obtained through other media.
  • There is no discernible business benefit for the sponsor, e.g. the sponsored organisation is in financial difficulties and the sponsor provides non-contractual payments for no additional benefits or services (Interfish Ltd v Revenue and Customs Commissioners [2015] STC 55).

If the business and non-business related elements of the sponsorship can be clearly identified, the business element may be apportioned and treated as deductible.

HMRC manuals at BIM42555-BIM42565 cover the principles for assessing the deductibility of sponsorship.

Preparation of accounts, tax enquiries and appeals

Accountancy fees for preparing financial statements are allowable expenses under general principles, and this includes the cost of preparing tax provisions and professional valuations of property or other assets for accounting disclosures.

Costs in preparing a tax return for a business are disallowable under the principle established in Smith’s Potato Estates Ltd v Bolland (1948) 30 TC 267, where it was held that costs in establishing a tax liability have no trade purpose but instead relate to an obligation to pay tax. By concession (see BIM46450), fees for recurring tax compliance of a business, including a partnership return, are deductible. However, the following costs are disallowed:

  • Completion of personal tax returns of the partners or the directors of a company.
  • Dealing with an HMRC enquiry, except where there is no adjustment to the return or if the inaccuracies or additional liabilities are not due to careless or deliberate behaviour.
  • Premiums for fee protection insurance that entitles the taxpayer to recover professional fees incurred in negotiating further tax liabilities due to careless or deliberate behaviour (HMRC do not accept any apportionment of premiums).
  • The costs of an appeal to First Tier Tribunal or a higher court, regardless of the outcome for the taxpayer.

Where a business requires certainty on the tax treatment of a contentious issue, the purpose of making an appeal may not be clear and it might be argued that establishing the correct tax liability is not the main purpose. The outcome of an appeal may influence planning decisions for the business (e.g. the decision may impact on future employment status issues or the recovery of input VAT).

HMRC summarise their views on expenses in connection with tax and accounting compliance at BIM46445 - BIM42565.

Nicola Moore

TheA-Z of Business Tax Deductions” by Annette Morley and Nicola Moore is a practical guide on the principles of deductions for unincorporated businesses and can be ordered on the Bloomsbury website.

Written by Ellie MacKenzie

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