This case considered whether legal fees were incurred wholly and exclusively for the purposes of the trade and therefore are allowable trade deductions.

Background

HMRC disallowed a deduction for legal expenses claimed by the taxpayer in the business accounts. The taxpayer claimed that legal fees were a deductible trading expenses citing the authority of Southern v Borax Consolidated Ltd (1940) 23 TC 597 which concerned the deductibility of legal costs incurred in resisting an action to dispute the title of the company to real property which the company held. HMRC claimed that legal fees were not a deductible trading expense as the expense was incurred to defend an interest against a sibling and that did not constitute an expense incurred for the purpose of the trade.

The legal fees were incurred as a result of a dispute between the taxpayer and his sister. She claimed that she was a partner and thus entitled to the assets and profits of the business. Her claim was dismissed by the High Court as it was held that the true nature of the dispute that led to the incurring of legal fees was a defence of an unjustified claim in order to preserve the assets of the business.

Decision

The First Tier Tribunal in reaching a decision referred to judgements of previous courts which considered the deductibility of expenses incurred in preserving a business asset. In Cooke v Quick Shoe repair Service (1949) 30 TC 460, the judge found that “if money is expended with a view to preserving an asset, the result of it is, once the Commissioners are satisfied of that circumstance, it may be a deductible expenditure”. In Morgan v Tate & Lyle Ltd (1954) 35 TC 366 the fact that the preservation of the business assets may be so significant as to go to the possible survival of the business is not sufficient to tip the nature of the expenditure from revenue to capital. The decision in Southern v Borax Consolidated Ltd (1940) 23 TC 597 found that legal fees in dispute were deductible as they were “expenses which were incurred in the ordinary course of maintaining the assets of the company”.

The Tribunal accordingly found that in this case the purpose of the disputed legal fees was to preserve the assets and trade of the taxpayer and that expenditure was incurred wholly and exclusively for the purposes of the trade. The taxpayer's appeal was allowed.

The full text of the case is available at http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02136.html