Accountancy fees

Conditions

1. GOV.UK says a sole trader can claim for hiring of accountants, solicitors, surveyors and architects only for business reasons. It also says you cannot claim for the cost of preparing and submitting your Self Assessment tax return.
2. HMRC's manual says fees incurred for preparing accounts for commercial reasons and for many other accountancy services satisfy the 'wholly and exclusively' test (BIM46450). It says that in strictness any additional fees incurred for computing and agreeing the tax liability on trading profits are not allowable, but that there is a longstanding practice of allowing normal recurring legal, accountancy etc expenses incurred in preparing accounts, or agreeing the tax liability (BIM46450). HMRC's Enquiry Manual states the practice for sole traders and companies alike: it allows the normal accountancy expenses incurred in preparing accounts or accounts information and in assisting with the self assessment of tax liabilities (EM3981). GOV.UK and the manuals are stated here as each states it. Where one bill covers the accounts and the return, ask your accountant to itemise it.
3. That practice does not extend to other personal expenses: HMRC gives the costs of completion of a tax return or the computation of Capital Gains Tax liability as examples that are not allowable in computing trading profits (BIM46450).
4. For a limited company, HMRC's practice is to allow the normal accountancy expenses incurred in preparing accounts or accounts information and in assisting with the self assessment of tax liabilities (EM3981), subject to the wholly and exclusively rule (section 54 CTA 2009). A director's own personal tax return is not part of the company's accounts. Where a company pays a bill that is in law the director's own debt, HMRC treats the payment as taxable as earnings if it comes from the employment (EIM00580); how a particular arrangement is taxed depends on whose liability the bill is, so ask your accountant.
5. Additional accountancy fees arising from an HMRC enquiry are allowable where the enquiry results in no addition to profits, or an adjustment to the profits for the year of enquiry only that does not arise from careless or deliberate behaviour. They are not allowable where the enquiry reveals discrepancies and additional liabilities for the year of enquiry, or any earlier year, which arise from careless or deliberate behaviour (EM3981).
6. An employee's own accountancy fees, such as for a personal tax return, are deductible only if they meet the general rule for employees: obliged to incur and pay them as holder of the employment, and incurred wholly, exclusively and necessarily in the performance of the duties (section 336 ITEPA 2003).

Common mistakes

• Claiming the cost of personal tax advice unrelated to the business — HMRC's practice does not extend to other personal expenses (BIM46450).
• Treating fees for buying, selling or changing a capital asset as ordinary accountancy costs. Under traditional accounting, and for a company, professional fees connected with the acquisition, disposal or modification of a capital asset are capital expenditure (BIM46400); the cash basis has its own capital rules (section 33A ITTOIA 2005).
• Claiming the fee for your Self Assessment tax return as a business expense — GOV.UK says it cannot be claimed.

What to keep

• Invoices from your accountant or bookkeeper.
• Where one bill covers business and personal work, an itemised invoice showing the split.

Real-world example

A limited company pays its accountant to prepare the annual accounts and help with the company's Corporation Tax self assessment. HMRC's practice is to allow the normal accountancy expenses incurred in preparing accounts and in assisting with the self assessment of tax liabilities (EM3981), so the fee is deductible as a normal running cost.

Frequently asked