This is a draft cheat sheet. It is a work in progress and is not finished yet.
Deductible Expenditure - General Rule
Expenses are deductible if they are incurred wholly and exclusively for the purposes of the trade. |
Classes of Allowable Expenditure
Expenses must be wholly and exclusively for trade purposes. Key allowable costs include: |
1. Interest (except on overdue tax). |
2. Legal & professional fees (unless for capital items). |
3. Damages & compensation payments. |
4. VAT unable to reclaim. |
5. Trade subscriptions. |
6. Employees’ remuneration (genuine salaries; excessive payments to relatives disallowed). |
7. Theft by staff (unless they control the business). |
8. Travel expenses (excluding home-to-work commutes, unless home is the work base). |
9. Patent royalties & trademark registration costs. |
10. Incidental loan costs (for business loans). |
Current Year Basis
CYB |
when business profits are taxed in the owner’s tax returns. |
| |
- During the main years of operation, CYB is the standard method. |
| |
Example |
A trader with a 31st December 2023 year-end would have profits taxed in the 2023/2024 tax year. |
|
|
Disallowed Expenditure
Certain expenses are disallowed for tax purposes under Case Law or Statute Law: |
1. Capital Expenditure (ITTOIA 2005) |
No clear definition, but includes items providing an "Enduring Benefit" (Atherton v British Insulated & Helsby Cables). |
| |
2. Drawings |
Owner’s personal withdrawals, salary, or benefits (e.g., tax/NI payments). |
| |
3. Provisions |
Generally allowed if following accounting standards, but general provisions for bad debts are disallowed. |
| |
4. Entertainment and Gifts |
Customer entertainment is generally disallowed. |
| |
Allowed deductions: Staff parties (employees may be taxed). Gifts to employees (wholly & exclusively for trade). Samples of trading goods (PR exercise). |
| |
5. Political Donations and Subscriptions |
Generally not allowed, unless providing a definite trade benefit (Morgan v Tate & Lyle). |
| |
6. Fines and Penalties |
Generally not allowed, but parking fines for employees using company vehicles are permitted (employee may incur a benefit-in-kind tax). |
| |
7. Illegal Payment |
Payments like bribes or blackmail are not allowed. |
|
|
Expenditure not shown in accounts
Depreciation (a capital item) is added back and replaced with Capital Allowances, the tax-equivalent deduction for capital expenditure. Details follow in the next lecture. |
Adjustments relating to Income
To calculate taxable profit, income adjustments are needed: |
1. Remove Non-Trading Income |
Examples: |
• Interest and income are taxed elsewhere. |
• Profits/losses from capital asset disposal. |
• Changes in general provisions (already noted under expenses). |
| |
2. Insert Missing Trading Income |
- Typically includes owner consumption of own goods, treated at market value (ITTOIA 2005). |
|
