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8th April 1993, Page 46
8th April 1993
Page 46
Page 46, 8th April 1993 — MONEY
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Which of the following most accurately describes the problem?

MATTERS

Tie Independent Financial Advisers Group estimates that businesses are over-paying taxes by approximately £21m a year through failure to take into account all allowable business expenses.

The full profits or gains arising from a trade for a year of assessment (for a sole trader or partnership) or an accounting period (for a company) are chargeable to income tax or corporation tax respectively. The Taxes Acts do not define the classes of expenditure which are deductible in computing the profits of the trade. The right to deduct is inferred from the fact that it is the profit not the receipts of the trade which are taxed.

Generally, therefore, an item of

_L been incurred for business purposes and only for business purposes in order to be deductible for tax purposes. Expenditure only partly for business purposes is in theory not deductible at all, although the Inland Revenue may by concession allow a proportion of expenditure with a genuine business element. The leading case in this area resulted in the disallowance of expenditure on clothing for use by a barrister in court, as the purchase of the clothing had, in addition to business purposes, the purposes of providing warmth and decency for the barrister.

2The expense must be an expense of earning profit, and not a division of profit—for example the payment of a dividend or of a profit share to a partner in a partnership.

OThe expense must be of Jan income nature as opposed to a capital nature. In general terms income expenditure is made in response to recurring or continuous demand, for example wages and salaries or the repair and maintenance of business

equipment or premises, whereas capital expenditure is made once for all, for example on acquiring business assets. Capital allowances provide a mechanism for permitting the deductibility of a proportion of some classes of capital expenditure against trading income and are mentioned below( see also CMMoney Matters 21-27 January).

The expense may also be expressly barred from deduction by a statutory provision the principal statutory disallowances are contained in section 74 Income and Corporation Taxes Act 1988, and broadly reflect the above case law principals.

A strict statutory prohibition now applies to the deduction of expenses incurred in providing entertainment, including hospitality of any kind. However, the strict rule is subject to a number of limited relaxations, for example in relation to the provision of small gifts carrying conspicuous advertising.

Some items of expenditure are expressly allowable by statute. Included are the incidental costs of raising servicing and repaying some categories of loan finance, including fees and commissions.

As mentioned above, capital allowances are available in respect of specific classes of capital expenditure, including some expenditure on industrial buildings and on plant and machinery to be used for carrying on a trade. "Plant" includes the apparatus used for carrying on a business.

The allowances must be claimed, and, in relation to plant and machinery, are allowed on the outstanding unallowed balance or pool of capital expenditure incurred by the business. The plant and machinery allowances are currently an initial allowance of 40% of the expenditure, if incurred in the year to 31 October 1993, and 25% of the pool of qualifying expenditure on a reducing balance basis.

The scope for the deductibility of expenditure is therefore broad—it is limited in many cases solely by the constraints of general accounting principles and the necessity to provide adequate evidence of the expenditure and its purpose. To a large extent the onus of proving the allowable nature of the expenditure falls on the trade; it is essential that sufficient records to justify claims for deduction are kept. If in any doubt as to the availability of deductions or allowances, it pays to obtain professional advice before approaching the Inland Revenue.

by Richard Hutchinson Hutchinson is partner in charge of the corporate tax unit at law firm Eversheds, Hepworth and Chadwick: phone (0532) 430391.


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