Whether legal fees are allowable or not can sometimes cause confusion for directors of small companies.

The general rule is that legal fees which are incurred as part of a company’s normal trading activities (revenue expenses) are allowable as a deduction against corporation tax.

These will include legal fees related to:

  • Employment related matters
  • Rent reviews
  • Trading disputes
  • Lease renewals
  • Collection of debts

Legal costs that are related to capital items and items that are not considered to be part of normal trading activities will not be allowable against corporation tax.

These will include legal fees relating to the following:

  • The acquisition of properties (including stamp duty)
  • The issue, amendment or cancellation of share capital
  • The initial purchase of a new lease

Fines, penalties and their related legal costs are not allowable as it is considered that breaking the law is not part of the normal trading activities of a company. Costs relating to personal legal issues or private disputes are also not allowable as these are not considered to be a company expense.

The general rule for expenses to be allowable is that, to be allowable they have to pass the “wholly and exclusively” test but this can sometimes be difficult to ascertain with the more complex areas, for example compensation payments for injuries suffered or payments for damages. In these cases it would be wise to obtain advice from your accountant.

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Author: Chris Morey, Director, Plus Accounting

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