How are the non-deductible expense and deductible expense used in the computation of trade profits after register a business in UK?


04 Jan

For calculating the trade profits of a business after setting up a business UK, it is important to consider the deductible and non-deductible expense, and this will be the topic of discussion in this blog. The topics under consideration will be the expense not entirely and exclusively for the trade purposes, bad debts or the impairment losses, unpaid remuneration, entertaining and gifts and the national insurance contributions etc. particularly with the consideration of the scenario when registering a new business UK.

Expenses not Entirely and Exclusively for Trade Purposes

The subtraction of the expense is not done if it is not for the purposes of trade (the remoteness test), or if according to the duality test, more than one purpose is reflected by it. The private portion which is not deductible includes the payments for motoring expenses, telephone expenses, heat and light expenses, rent and the expenses of a proprietor. The relief is provided on the element of business after setting up a business UK in the case of a possibility of the exact apportionment. When the payments are made to the employees or are on the behalf of employees, the deduction of the full amounts is to be done but the taxation of the employees is done according to the benefits code.

The following mentioned cases illustrate the remoteness test:

  • Strong & Romsey Co Case 1906: A claim was made for compensation to a company by a customer who got injured due to a falling chimney in an inn (owned by a brewery) while sleeping. The compensation was not considered to be deductible as the appellant who sustained the loss was not actually incidental to their trade as inn keepers and fell upon them in their character of householders and not of innkeepers.
  • Bamford Case 1972: A malapportionment of £15000 was done by a director. The loss was not said to be allowable by the statement that in the case of a shop assistant who is not honest, the loss is not an incident of the trading activities of the company. Its occurrence takes place altogether outside such activities.
  • Vodafone Case 1995: The expense that is entirely and exclusively to benefit the trades of several companies (such as, in a group) but is not exclusively and entirely to benefit the trade of one specific company is not to be subtracted.
  • Mcknight Case 1999: The expenses suffered by a stockbroker for the defense of allegations of infringement of the regulations of stock exchange were brought under consideration. It got discovered that the suffering of the expense was done for the prevention of destruction of the business of taxpayer who have register a business in UK and that as the expense was suffered for the purposes of business, it was to be subtracted. It was also brought to discovery that although the expense had the effect of the preservation of taxpayer’s repute, that was not its aim, so no duality of purpose was found out. The following cases illustrate the duality test:
  • Cailebotte Case 1975: When a self-employed carpenter came under the obligation of buying lunch away from home, he spent an average of 40p each day but just 10p when he had his lunch at home. He made a claim of the excess 30p. A decision was made that there was a dual purpose of the payment and it was not held deductible with the statement that a taxpayer should eat to live and not eat to work.
  • Mallalieu Case 1983: A lady barrister had to wear some black clothing in the court and the expense on its repair and cleaning was not to be subtracted. The expense was for the dual purpose of allowing the barrister to be clad warmly and in a proper manner as well as meeting her professional requirements.
  • McLaren Case 1996: The trade of public house was done by a publican that had residential accommodation above it. It was made obligatory for him to be a resident at the public house but he also had the option of his other house that he visited on a regular basis. It was then held that the expenditure’s private element suffered at the public house on rent, electricity, gas etc. was not suffered for the aim to earn profits but for the serving of non-business purpose of satisfying the ordinary human needs of the publican. Hence, the expense was disallowed as it had a dual purpose. However, during a business trip the price of overnight accommodation may be subtracted and also the deduction of reasonable expense on breakfast and evening meal in conjunction with such accommodation may also be done.

Bad Debts or Impairment Losses

For the purposes of tax, only the impairment losses where the liability was suffered exclusively and entirely for the trade purposes are to be subtracted. For example, the loans given to employees in a written form are not subtracted until and unless the business is that of making loans, or it can be shown that the written off loan was the payment of earnings made for the trade advantage.

According to the FRS 26 Financial Instruments, the measurement should be carried out which is the review of all trade receivables for the assessment of their fair value at the balance sheet date and any impairment losses written off. The accounting treatment is followed by the tax treatment so there is no requirement of adjustment for the purposes of tax. As a result of FRS 26, it is not much possible that any general provisions will now be noted. In the case that they do occur, the increment or decrement in general provision are not allowable or liable to tax and there will be a need of some adjustment.

If the recovery of an impairment loss is made which was subtracted for the purposes of tax, the recovery is taxable so there is no requirement of adjustment to the recovery amount mentioned in the statement of profit or loss.

Case of Unpaid Remuneration

If after business registration UK charging of the earnings for employees is done in the accounts but their payment is not made within the duration of nine months of the termination of accounting period, the cost is only to be subtracted for the period of account in which the payment of the earnings is made.

When a computation of tax is made within the period of nine months, an assumption is made initially that the payment of the unpaid earnings will not be made within that period. The adjustment of computation is done if their payment is so made.

The treatment of earnings is done as paid at the same time as their treatment is done as acquired for the purposes of employment income.

Entertaining and Gifts for Employees

As a general rule, the expense incurred on the gifts and entertainment is not to be subtracted. This is applicable to the amounts whose reimbursement has been done to employees for particular gifts and expenses for entertainment, and to round sum the allowances that are meant to meet such expenses exclusively. For the purposes of corporation tax and income tax, there is no difference between the customers of UK and abroad. In the case of value added tax, a different rule is applicable.

Some particular exceptions exist to this rule. These include:

  • The gifts to customers whose cost is not above £50 per year are permitted if there is a conspicuous advertisement and are not food, drink, vouchers or tobacco exchangeable for the goods.
  • Normally, the entertaining for the employees and the gifts are not to be subtracted despite the fact that a charge to tax may occur on the employee according to the benefits legislation in the case where entertainment is excessive or gifts are made.
  • The gifts given to charities may also be permitted although many of them will fall foul of the wholly and exclusively rule mentioned earlier. If the declaration of a gift aid is made by an individual in regards of a gift, a relief for tax will be given according to the gift aid scheme, not in the form of an expense for trade. If a company makes a qualifying charitable donation, it will acquire a tax relief in the form of subtraction from the total profits.

Lease Charges for Cars with Carbon Dioxide Emissions more than 130g/km

For the leases initiating on or after April 6 2013 (April 1 2013 for companies having business registration UK), there exists a restriction on the leasing costs of a car with carbon dioxide emissions more than 130g/km during the computation of taxable profits, 15% of the leasing prices will be disallowed.

Payments of Interest

The interest that is permitted in the form of deductible interest is not allowed in the form of a trading expense.

Contributions of National Insurance

No deduction is permitted for any contributions of national insurance except for the contributions of employer.

Interest and Penalties on Tax

The penalties and interest on the payment of tax made late are not permitted in the form of an expense for trade. Income tax, value added tax, capital gains tax and stamp duty land tax are included in the definition of tax.

Payments Related to Crime

If a payment constitutes an offence by the person paying it, then it is not deductible. This includes the protection money whose payment is made to the bribes, terrorists and certain similar payments made abroad that would be considered as criminal payments if they were made inside the UK. Statute results in the prevention of any deduction for payments made in response to extortion or blackmailing.

Deductible Expense

The general rule states that the expenses which are suffered entirely and exclusively for trade purposes are not disallowed and hence most of the expenses will be deductible. Some expenses that might otherwise be disallowed according to the wholly or exclusively rule, or according to one or more of the particular rules mentioned above are exceptionally permitted by the legislation.

Expense of Pre-Trading

The expense which is suffered prior to the beginning of trade is to be subtracted, if it is suffered within the duration of seven years of the commencement of trade and it is of a kind that would have been deductible if the trade had already commenced. Its treatment is done in the form of an expense for trade suffered on the trading’s first day.

Incidental Costs of Acquiring Finance

There is a deduction in the case of incidental costs of acquiring the loan finance, or of making an attempt to acquire or redeeming it. These exclude discount on issue or a premium in the case of a redemption that are actually the substitutes for the payment of interest. This subtraction for the incidental costs is not applicable to companies because they acquire a subtraction for the borrowing costs in a different manner.

Case of Short Leases

An annual sum may be deducted by a trader in respect of the amount which is taxable on income tax on a lease premium whose payment they made to their landlord. As a normal practice, the amortization of the lease will have been subtracted in the accounts and should be added back in the form of capital expense.

Renewals

In the case where the replacement or alteration of a tool is done, then the price of alteration or renewal may be subtracted as an expense in particular instances. These are that the prohibition of a deduction would only be done because of the expense being a capital expense and no deduction can be given according to any other provisions, such as according to the legislation of capital allowances.

Restrictive Covenants

On the event of an employee leaving their employment, they may accept a limitation on their activities in future in a payment return. The payment is considered as a deductible expense of trade, if the taxation of the employee is done on the payment in the form of an employment income.

Costs of Seconding Employees

The costs of seconding employees to charities or the establishments related to education are also deductible.


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