Allowable deductions for employee-related expenses

Produced by Tolley
Allowable deductions for employee-related expenses

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Allowable deductions for employee-related expenses
  • Salaries and wages
  • Directors’ remuneration
  • Relatives
  • Accrued remuneration
  • Dividends and drawings
  • Termination payments
  • Pension contributions
  • Benefits in kind
  • Travel costs
  • More...

This guidance note covers thetax treatment of some common types of trading expenditure relating to employees. Some of these are disallowable under general principles, for example thewholly and exclusively test or capital versus revenue expenditure. Some are disallowed under specific statutory rules. For guidance on these, see theAdjustment of profits ― overview guidance note.

In this guidance note, unless otherwise stated, references to ITTOIA 2005 are relevant for sole traders / partners and references to CTA 2009 are relevant for companies.

Salaries and wages

The costs of employing staff is typically allowable provided it meets thecriteria of being ‘wholly and exclusively’ for thepurposes of thetrade. This includes wages or salary, plus any benefits in kind.

Where remuneration is excessive, it is possible that a deduction may be challenged on thebasis of not being for thepurposes of thetrade. This will normally only be applicable to remuneration of individuals who are connected to thebusiness in some way.

When considering thelevel of remuneration, thewhole package of remuneration, comprising salary, wages, benefits in kind, pension contributions and other perquisites must be considered. This does not include dividends received.

It is rare for remuneration to be disallowed on thegrounds that it is capital. However, it might apply where employees have devoted significant time to thecreation or acquisition of capital assets. This is most likely to relate to situations where construction workers perform work on their own premises or legal advisers reorganise their own business structures.

Any disallowance of salary costs will also apply to employer’s Class 1 or Class 1A NIC.

Directors’ remuneration

HMRC accepts that it is unlikely that controlling directors will have a non-business purpose in their level of remuneration, so their salary costs are usually allowable.

However, non-controlling directors remuneration packages are more open to question, especially where they are a relative or a friend of theowner. These may be compared with thelevels paid to other

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