Self assessment support – common adjustments in tax returns
As practitioners prepare to deal with the final months of the current self-assessment season, we highlight some of the areas which may receive extra scrutiny by HMRC.
In order to save time and costs in dealing with such adjustments, it would be advisable to be aware of some of the common areas of concern and ensure that the correct treatment has been made in the tax returns prior to submission.
Here are ten common adjustments that may arise in connection with the tax treatment of the following expenses.
Pre-trading expenses Expenditure of a revenue nature incurred in the seven years preceding the commencement of a trade, profession or vocation is deducted from profits in the first accounting period, provided that the expenditure would have been allowable if incurred after the trade had commenced.
Expenditure on food or drink for consumption by the trader The cost of food and drink consumed, and accommodation used, by a trader is not, in general, an expense incurred wholly and exclusively for the purposes of the trade since everyone must eat in order to live, and such costs are therefore usually disallowed.
However, expenses incurred by a trader on food and drink whilst travelling on business will be allowable where the business travel is, itself, allowable and the trade is, by its nature, itinerant or involves travel to a place only occasionally visited and not as part of the trader’s normal pattern of travel for the trade. Where a business trip by a trader necessitates one or more nights away from home, the hotel accommodation and reasonable costs of overnight subsistence are deductible.
Premiumspayable by a trader for business premises where the premium is treated as a property business receipt by the landlord Where land used in connection with a trade is subject to a taxed lease, the tenant under the lease is treated as incurring a revenue expense. ITTOIA 2005 / s277(4) expresses the amount of the premium to be treated as rent in the formula: P x (50-Y)/50. Where P = the premium and Y = the number of complete years in the term of the lease apart from the first. The amount of the expense for each day is equal to the amount of the taxed receipt divided by the number of days in the receipt period.
Expenditure on qualifying courses for retraining past or present employees for future employment elsewhere Under s34(1) ITTOIA 2005 expenditure is disallowed if it is not incurred wholly and exclusively for the purposes of the business in question. However, the existence of some non-business benefit arising out of expenditure does not cause it to be disallowed if, in fact, the expenditure is incurred exclusively for business purposes. So, expenditure on the training and development of staff whose relationship with their employer is limited to the employment itself is allowable. This remains the case where the expenditure is on the development of an employee's skills and attributes which may not be directly related to his or her current job with the employer. Where, on the other hand, an employee on whom the expenditure is incurred has a significant proprietary stake in the business, or is a relative of those who do, there is obviously a much greater chance that expenditure may have been incurred not, or not wholly, for business purposes, but to provide the employee with some personal benefit. If that is the case, then the expenditure is not deductible - the business purpose has to be the exclusive purpose. To take an extreme example, there could be no allowance for the educational costs of the business proprietor's son who is employed in the business during university holidays. In such cases, you need to assess whether the expenditure would have been incurred on an otherwise unconnected employee doing the same job.
Training costs of the taxpayer Costs incurred in maintaining, updating and developing existing skills while qualified are allowable, because there is a direct link between the expense incurred and income received. The cost incurred in the acquisition of new expertise is not allowed.
Fees and subscriptions Any annual subscriptions that are not made to a body shown in the official list 3, as approved by HMRC, will be disallowed.
Accountancy fees HMRC will not allow a deduction for the cost of preparing an individual’s personal tax return. However, accountancy fees for the preparation of business accounts are allowable expenses. Where fees are being charged at an all-inclusive rate, practitioners should ensure that the element relating to personal tax return work has not been claimed as a deduction against income.
Relocation expenses If the business is not moving to larger premises such expenses are allowed. However, if the business is moving to a significantly larger location, such that removal costs will be an ‘enduring benefit’ to the trade, the expenses are capital in nature and not allowed.
Fines and penalties Penalties/fines for a breach of regulations, or as the result of a prosecution for a trader’s breach of regulations, will not be an allowable expense. However, payments for damages that are compensatory rather than punitive are tax deductible. That includes, for example, damages for defamation payable by a newspaper company, where such claims are ‘a regular and almost unavoidable incident of publishing’.
Also, where an employer pays fines that are the liability of an employee, so that the employee is taxable on the payment as employment income, the cost to the employer of paying the fines is allowable in computing his/her trading profits.
Entertaining and gifts Expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it is a genuine expense of the trade or business. However, if the total cost of all assets gifted to the same person in the same basis period is not more than £50, and the gift bears the business name, logo or a clear advertisement, and the gift does not include food, drink, or tobacco, it is allowed.
The cost of staff entertaining is specifically allowed (ITTOIA 2005 s46).