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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Specific deductions: professional fees: taxation account & negotiations

Allow the normal costs of preparing business accounts

Fees incurred for preparing accounts for commercial reasons and for many other accountancy services satisfy the ‘wholly and exclusively’ test.

In strictness, any additional fees incurred for computing and agreeing the tax liability on trading profits are not allowable. There is, however, a longstanding practice of allowing normal recurring legal, accountancy etc expenses incurred in preparing accounts, or agreeing the tax liability, see Statement of Practice SP 16/91 reproduced at EM3981. This has been approved by the courts as a reasonable response to the practical difficulties of apportionment, see Lord Porter on page 288 and Lord Simonds on page 292 of Smith’s Potato Estates Ltd v Bolland [1948] 30 TC 267 (see BIM37850).

For the treatment of fees incurred in connection with the negotiations of an investigation settlement, see EM3981.

Non-trade liabilities

The practice referred to above does not extend to other personal expenses. For instance, the costs of completion of a tax return or the computation of Capital Gains Tax liability are not allowable in computing trading profits. But the additional personal costs are likely to be minimal where, apart from the computation of the tax liability on trading profits, an individual’s personal tax affairs are straightforward.