Your accountant recently settled a long HMRC enquiry on your behalf resulting in an adjustment to your tax return. His fees for this were more than the extra tax you had to pay. Are you entitled to a tax deduction for them?
Give and take
It’s not unusual for taxpayers and HMRC to each concede ground in order to settle an investigation. This was the position our subscriber found himself in earlier this year. Considering the huge adjustments HMRC had been pushing for when the enquiry began, the result was a victory for our subscriber’s accountant and legal team. The trouble was, their fees for the job ran into tens of thousands of pounds. Naturally, our subscriber wants to claim a tax deduction for them.
Accountancy etc. fees – general rule
Applying tax rules strictly no tax deduction should be allowed for costs you incur, e.g. accountancy fees, for preparing your personal tax return, or handling HMRC’s questions connected to it. However, it has for a long while taken a pragmatic view. In its guidance it says that it’s happy to accept a deduction for “normal accountancy expenses incurred in preparing accounts or accounts information and in assisting with the self-assessment of tax liabilities” .
Tip. Other professional fees directly relating to running your business are also tax deductible, e.g. staff payroll and workplace pension management.
Trap. Fees your accountant charges you for services not directly linked to your business aren’t deductible. For example, those for advice on inheritance tax planning.
Special rule for enquiry costs
Notwithstanding its general policy, HMRC isn’t keen on allowing a tax deduction for accountancy fees where they are incurred because of an investigation into your business accounts (and therefore also your tax return). The good news is it accepts that if the investigation turns up nothing, and so no changes are needed to your tax return, it won’t refuse a deduction. Unfortunately for our subscriber, adjustments were required to his figures, but that’s not the end of the story.
Careless or deliberate?
The good news is HMRC’s practice of allowing accountancy fees relating to an enquiry extends to where adjustments are needed but the errors in the accounts or tax return weren’t as a result of careless or deliberate behaviour by the taxpayer. This is confirmed in HMRC’s internal instructions. This means our subscriber is in the clear to claim a deduction for the extra accountancy and related legal costs.
Penalty indicators. If HMRC believes that adjustments to your accounts and tax return were needed because of careless or deliberate behaviour, it will charge penalties equal to between 10% and 100% of the extra tax (and Class 4 NI) resulting from the corrections required. Tip. It will not charge penalties where it accepts that the errors were innocent and that you took all reasonable steps to ensure your accounts and tax return were correct. For example, if you claimed a tax deduction for an expense which you had no reason to believe was wrong having made reasonable checks, or a figure was misread by your bookkeeper.