HMRC will often take a very close look at the purpose of the legal costs, and if it doesn’t think they are wholly and exclusively incurred in connection with the business, it will challenge the claim, and having to pay 100% without the tax relief can be painful.
This week, there was both good news and less good news in two non-GP cases, but the principles and judgements will apply to GPs and all other businesses. In one interesting case concerning a Post Office in Linslade, Bedfordshire, HMRC challenged the legal costs of £36,000. These costs were incurred by two brothers in fighting off a claim by their sister that she had become an equal partner after contributing some capital. HMRC took the view that defending the brothers’ interests against their sister was not wholly and exclusively in connection with the business, however the judge ruled that the purpose of the legal fees was to preserve the assets of the trade, and should be allowed. (It would be worth making a note of this phrase)
Good news, we thought, we accountants like it when the law is clarified in favour of the client. However very quickly after this judgement came another less welcome.
The facts of the second case are rather complicated, but can be summarised as this: two brothers (not the same two brothers) owned shares in a US company that owned shares in a UK company that supplied goods to Cuba. Now this contravenes the US Trading with the Enemy Act, and the US government started legal proceedings. The UK company made a payment towards the legal fees defending the claim, and the UK company claimed tax relief on these legal fees. The brothers argued that the tax relief on the legal fees was to stop the US government blacklisting the company’s trade, and was therefore wholly and exclusively in connection with the company’s business. HMRC argued instead that the expense was to protect the brothers against any personal charges that the US government might bring, and not for the company’s trade. And HMRC won.
So does that leave us any clearer? Well not really, perhaps, but what is clear is that the assumption that tax relief on legal fees will be available should not be taken for granted!