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CATEGORY - CORPORATION TAX

TRADING EXPENSES

Many company directors fondly imagine that all expenses to do with running a business are allowable against corporation tax. Sadly that is not the case - an expense must have been incurred in the course of a company's trading activities in order to be deductible against tax. It is therefore necessary to classify your expenses properly and ensure that non-deductible items are shown separately in your accounting records.

The most widespread exclusion is business entertaining. Any expense that directly or indirectly benefits another individual when nothing is obtained by the company in return is not considered to be for trading purposes, no matter what favours or opportunities may eventually arise as a result of your largesse. This rules out traditional forms of entertaining such as food and drink or admission to sporting or cultural events. Corporate hospitality, on the other hand, may not be disallowable in full if it relates to promotional activities such as conferences or business functions. For example, if you host a party to celebrate the 10th anniversary of your company and invite all your clients and service providers along, only the food and drink consumed by the guests is disallowable. The cost of hiring the venue, producing promotional material, hire of audio/visual equipment and even the serving staff at the event are all trading expenses. The travel and subsistence costs of your own staff are also allowable if it is part of their duties to attend the event and look after the guests. Invoices for such events should therefore be fully itemised, not just for corporation tax but also for VAT where the same rules apply.

Depreciation is another disallowable item as the acquisition of tangible fixed assets is not considered to be a trading expense. They merely facilitate trade as they are not fully utilised on the activity concerned. You are instead allowed to claim capital allowances, although it should be noted that these are not simply a tax version of depreciation. Capital allowances are meant to be tax breaks for investment and do not apply to all fixed assets. On the other hand, amortisation of intangible assets such as purchased goodwill is deductible against tax provided it was created on or after 1st April 2002 and was not paid to a connected party (such as a sole trader incorporating his business).

Legal and consultancy is a happy hunting ground for any tax inspector looking for expenses to disallow. That is because so much of it tends to be ancillary to the trading activities of a company rather than directly related. For example, a company may incur legal fees on buying property. This is not a trading expense but one that is incurred in acquiring a capital asset, and is therefore only deductible against a future chargeable gain (or loss) when the property is sold. Legal fees may also be incurred on raising share capital or drawing up shareholder agreements. Again, this is nothing to do with the company’s trading activities. Neither are consultancy fees for work or advice on group re-constructions or preparing a business for a stock market flotation. Accountancy fees for due diligence work are another non-trading expense. It is very important to identify this sort of expenditure in the accounting records as tax advisors will always ask for a breakdown of Legal and Consultancy fees.


Acumen Tax Solutions
2 Purley Bury Avenue, Purley Oaks, Surrey CR8 1JB
Tel: 020 3669 5270 Mobile: 07813 582890 E-mail: info@acumentaxsolutions.co.uk

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.

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