Business or personal?
You can only claim expenses against your profits for tax if they are ‘wholly and exclusively for the trade’. If something has a private motive, it isn’t allowable at all – unless the private is completely incidental to the business. Two recent appeals on legal expenses show how fine the line can be.
One appellant ran a transport company. One of his drivers caused the death of a pedestrian, and he was prosecuted for gross negligence manslaughter and for conspiracy to pervert the course of justice. He was found not guilty on the first but convicted of the second. He claimed £270,000 in defence costs against his business profits over 3 years. HMRC ruled – and the Tribunal agreed – that keeping himself out of jail had to be at least a significant part of his motive for spending the money. It wasn’t only about retaining his operator’s licence so the business could continue – none of it was allowable.
The other appellant ran a business advising high net worth individuals on investment opportunities. When the CEO of a company wrote to shareholders claiming that he had lied in e-mails, he and his company sued for defamation, and claimed legal costs of £459,000 incurred in bringing the action. Here, the Tribunal accepted that preserving the business was the sole reason for the expense, and any personal benefit to the individual’s reputation was a by-product.
If you are not sure what is an allowable expense, we can help.