Owner-Managed Businesses

Legal and professional fees

Produced by Tolley
  • 01 Jul 2022 09:31

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

  • Legal and professional fees
  • Practical considerations when analysing legal fees
  • Are the legal fees capital in nature?
  • Treatment of legal fees on subsequent disposal of the associated asset
  • Costs relating to the business structure
  • Financing costs
  • Legal fees and intangible fixed assets
  • Are the legal fees incurred wholly and exclusively?
  • Tax and accountancy fees
  • Recurrent fees
  • More...

Legal and professional fees

Statutory references to ITTOIA 2005 relate to unincorporated businesses and CTA 2009 relate to companies unless otherwise stated.

Legal and other professional fees can represent substantial costs to a business. A detailed analysis is often required for the purpose of preparing tax computations as this category of expenditure represents a significant risk for disallowed items.

As a general rule, legal and professional fees are usually disallowed due to relating to:

  1. items of a capital nature (this is the most likely category), or

  2. not being wholly and exclusively incurred for the purpose of the trade

The difficulty comes in applying these general rules to particular items of expenditure. Even where an item of expenditure is found to be revenue rather than capital in nature, it still needs to be shown that it also meets the wholly and exclusively test. The general concepts are discussed in the Wholly and exclusively and Capital vs revenue expenditure guidance notes. The legislation does not provide further detail on which fees are disallowable, and for this reason a substantial body of case law has developed regarding the tax treatment applied by the courts in respect of particular expenses.

Where legal and professional fees are incurred in connection with another disallowable expense, they will most likely be disallowed too. Likewise, where legal and professional fees have been incurred in connection with expenditure that is specifically allowed, it is likely to be an allowable deduction.

For further types of legal and professional fees, see Simon’s Taxes B2.449.

Practical

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