Tax allowable or not?
All expenditure made by a business falls into one of seven categories:
- Not related to the business – not allowable
- Business related, but specifically not allowable (entertaining, fines, tax, national insurance, dividends etc)
- Mixed business & private expenditure (duality of purpose), where the business element cannot be precisely defined – not allowable
- Mixed business & private expenditure where the business element can be precisely defined – allowable (business element only)
- Revenue expenditure that is wholly and exclusively laid out for business purposes - allowable
- Capital expenditure, not allowable against profit but, where capital allowances can be claimed
- Capital expenditure where the tax relief can only be claimed against the capital gain, when the asset is sold.
It is the term ‘wholly & exclusively’ that has caused problems in the Courts. HMRC adopts a strict definition of the legislation, as being solely for the purpose of the trade.
Any claim submitted to HMRC is processed, almost automatically and normally without question at the time, whether it be for an Expenses, Capital Allowances or Capital Gains. However the validity of the claim can be questioned by HMRC many years later, and if they successfully challenge it, the cost can be extremely high when taking into account the tax, the interest and the penalties. The most frequent challenge is where there is a ‘duality of purpose’ (3. & 4. above) and whether a precise apportionment can be made.
If a claim passes the wholly and exclusively test, and if any private element can be precisely calculated then it is irrelevant how much is paid. For example a chauffeured Rolls Royce to a business meeting in London would be fully allowable.
A further problem can arise where payment differs from the contracted agreement. If it can be established that both parties agree that the contract has been overridden and that no creditor or prepayment is being built up, then the implied or verbal agreement takes precedence over the written contract.
For a more detailed explanation please contact Martyn