A first tier tax tribunal that ruled in favour of the taxpayer, in a case concerning the deductibility of legal fees for income tax purposes, is thought to have ‘widened the definition of business expenses incurred “wholly and exclusively” for trade that can be deducted from profits’.

Online accounting community, AccountingWEB.co.uk , has reported that tax consultancy Gabelle believes that the First Tier Tax Tribunal ruling in favour of the taxpayer, in the case of Linslade Post Office and General Store v HMRC, has “underscored the need for accountants to give careful consideration to whether legal expenses are tax deductible”.Post Office wins First Tier Tax Tribunal

The Linsdale Post Office First Tier Tax Tribunal was brought forward by Mr Shabir Visanj, who runs the Linsdale Post Office and General Store with his brother and business partner, in a dispute against his right to deduct £36,000 of legal costs from their business profits, for income tax purposes.

The £36,000 worth of legal expenses which Mr Visanj wanted to deduct from business profits were incurred in 1996 when his sister alleged that she was an equal partner of the business as she had “contributed funds to the capital of the partnership”, claiming that she was entitled “to a share of profits and assets accordingly”; a claim which was dismissed by the High Court.

According to HMRC the £36,174 legal fees were not liable to be deducted from overall business profits under sections 33 and 34 of the Income Tax (Trading and Other Income) Act 2005, because legal fees paid by the brothers did not constitute a business trading expense incurred “wholly and exclusively”, as it defended their interests against a family member and not a trade partner.

Rejecting HMRC’s argument that the legal fees did come under expenses incurred “wholly and exclusively” for trade that can be deducted from profits, First Tier Tax Tribunal judge, Peter Kempster, published his ruling in July:

“Accordingly, we find that the purpose of the disputed legal fees was to preserve the assets and trade of the Appellant partnership, that expenditure was revenue in nature, and also incurred wholly and exclusively for the purposes of the partnership’s trade.”

Could this ruling in favour of the taxpayer have widened the definition of ‘wholly and exclusively’ for trade; seeing a future change in cases brought to the First Tier Tax Tribunal?

Kevin Kinsella Snr | KinsellaTax UK LtdKevin Kinsella, of KinsellaTax UK Ltd, said:

“I am personally delighted with the outcome of this case. It seems to me to be based on pure common sense. I had a case where my client had paid a lot of legal fees to defend his position as a tenant and preserve his farm. HMRC still expected to receive income tax and VAT when my chap won his case but did not agree the legal expenses were deductible. The first tier tax tribunal thought otherwise, but my client was involved in my company’s costs before getting a successful outcome. The stress and worry on my client, and whether or not he was just throwing away more costs, were immense. As for the actual review system, it is just a joke. I no longer ask for reviews, I go straight to the first tier tax tribunal, which although slow, does actually seem to work on a more independent basis than the old General Commissioners’ and Special Commissioners’ hearings.”

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