Deductible Expenditure
We have written about some of the expenses you are likely to incur (excluding any payments in respect of Chambers). As a result, this should help you to understand what it means to be self employed as a Barrister. After that, we have explained how they are treated for income tax and VAT purposes.
Motor Expenses
• Self-Assessment Tax
You are allowed a proportion of your total motoring expenses as a deduction against your income tax liability. So, you can claim an annual writing down allowance to cover the decline in value of your car. This is calculated based on the price you paid for it. The percentage applied will depend on the carbon dioxide emissions of your vehicle. New zero emissions vehicles qualify to be wholly tax allowable in the year of purchase.
You should keep a log of your total mileage for the accounting period and then details of any business miles. This is to allow an exact distribution of business and private mileage. In practice, if these records are kept for a couple of months per year, H.M. Revenue & Customs will normally accept this as suitable proof of your business percentage.
Business miles do not include travel from home to your normal place of work, which would normally be Chambers. Likewise, the deduction of parking expenses is only based on parking away from your normal place of work. The only exception to this is when you have had to return to Chambers after initially parking there. At this point the second and later parking is allowable.
All motoring expenses are allowable for income tax purposes. These would normally include servicing and repair costs, fuel, AA fees or similar, motor insurance and road fund licence.
• VAT
VAT recovery on motor expenses is not allocated in the same way as it is for Self-Assessment tax. As a result, the VAT element of any expenses gained on your motor vehicle will be fully deductible as input VAT. The only exception to this is the VAT on fuel. When recovering the VAT on fuel you must account for what is known as a VAT fuel scale charge. The charge is based on carbon dioxide emissions (CO2), the lower the CO2 emissions the lower the charge.
If you have a lease for your business vehicle you can reclaim 50% of the VAT on each lease payment. This includes a contract hire lease or a PCP lease with a large balloon payment. It must be equal to the expected market value of the car at the end of the lease.
Professional Indemnity Insurance
• Self-Assessment Tax
Premiums paid on Professional Indemnity Insurance are fully deductible for income tax purposes.
• VAT
There is no VAT charged on Professional Indemnity Insurance and you are not able to reclaim insurance premium tax. This applies to all forms of insurance.
Professional Clothing Expenses
• Self-Assessment Tax
The costs of wigs, gowns and collars are deductible for income tax purposes. However, expenses on “normal” clothing (i.e. suits) is not deductible for income tax purposes.
• VAT
Again, the VAT element of wigs, gowns and collars are fully recoverable. There is a practice where you can reclaim the VAT on up to two dark suits. This is per annum, and they must be for use in court.
Books, Stationery and Subscriptions
• Self-Assessment Tax
These are fully recoverable for income tax purposes, providing, of course, it is solely for business purposes.
• VAT
Again, the VAT element of such expenses is recoverable where applicable. Books do not normally suffer VAT. You should only recover the VAT stated on the relevant invoice. E-books and other Internet based information services may have VAT charged on them and this can be recovered.
Professional Fees and CPD
Professional fees should be fully deductible for VAT and income tax purposes. This includes accountancy fees, and professional development, such as courses and seminars. Again, if they are incurred for business purposes.
Bank Charges and Financing Costs
• Self-Assessment Tax
Where you operate a separate practice account the bank charges on this account will always be allowable. There is the possible exception of excess overdraft fees if H.M. Revenue & Customs could claim that the overdraft had arisen out of personal activity rather than business activity.
Interest on overdrawn business accounts and loans taken out for practice purposes are allowable up to £500 per annum. This only if you are preparing your accounts on the cash basis. If you are accounting for debtors, then you can claim for overdraft interest for income tax purposes. This is only if the overdraft does not exceed the value of your aged debt. Moreover, interest on finance agreements to buy assets used in your practice will also be allowable for income tax purposes. In addition, interest when you buy a motor vehicle will only be allowable to the extent of the business proportion.
Interest arising on loans taken out during pupillage (to fund pupillage) is not allowable. This is because these loans were incurred to allow you to practice rather than during your practice.
• VAT
VAT is not charged on finance charges or on interest charged through financial instruments.
Travel, Accommodation and Subsistence
• Self-Assessment Tax
Costs incurred in business travel and overnight stays for business purposes are allowable for income tax. If you incur subsistence costs whilst working away from your normal location, you are able to claim such costs. This will affect you if you spend a lot of time at court where you use the catering facilities available. But, note that buying meals or drinks for others will be classed as “entertaining”. This is not deductible for tax purposes.
• VAT
Many forms of travel such as bus, train and airfares do not have VAT charged on them. Therefore, you should only recover VAT where you have a valid VAT invoice showing the amounts to be reclaimed. Further, VAT is recoverable on the hotel costs and costs of evening meals. However, it’s not recoverable on the purchase of either hot meals or beverages for colleagues or business associates.
Telephone and Broadband
• Self-Assessment Tax
Home Phone and Broadband
Most homes still have a hardwired phone line which is often required for internet access. However, many barristers pay a monthly subscription for the line, calls, internet, and other entertainment packages. Access to broadband is now a basic requirement for a barrister. Therefore, the cost of the landline and broadband provision will be considered as tax allowable. However, the cost of entertainment packages is a private expense and so the monthly subscription will need to be apportioned.
Mobile Phone
Where a fixed monthly contract is in place on a mobile reasonable percentage apportionment may be applied. When used for both private and business use it will be hard to specifically identify the business proportion.
• VAT
All Telecoms Expenses
The VAT treatment follows the Income Tax treatment. If the expense is wholly deductible for Income Tax purposes, then full VAT recovery is permissible. Where the monthly cost is for private use, then HMRC will expect a similar disallowance in the VAT input recovery.
Entertainment
No allowance is available for neither VAT nor income tax in respect of amounts expended in entertaining solicitors or clients. Amounts incurred in entertaining the staff of Chambers are deductible for income tax purposes.
Chambers Expenses
• Self-Assessment Tax
Rent and expenses charged by Chambers are deductible for income tax purposes, subject to any rules above.
• VAT
Again, the VAT element (if there is any) of rent and expenses are fully recoverable.
Use of Home
• Self-Assessment Tax
An apportionment of household costs can be claimed as deductible expenses for income tax. This is normally calculated based on using one room in the house as an office. Then a proportion of the related costs is based on a percentage of the floor space. This is based on the room relative to the house. The related costs may include rent, rates, gas, electricity, utilities, repairs and maintenance, insurance, and mortgage interest if applicable.
If the house is owned, you must ensure that the room set aside is also used for a private purpose. For instance, this could include dealing with personal correspondence or use as a spare bedroom for guests. This will ensure that principal private residence relief is preserved. Therefore, the whole property remains exempt from Capital Gains Tax on disposal.
• VAT
H.M. Revenue & Customs will not allow VAT recovery on household costs where there is private use. Their argument is that you would have to pay these costs irrespective of business usage. Therefore, it does not represent a business expense for the purpose of input VAT recovery
Computer and other Equipment
• Self-Assessment Tax
Office equipment, such as laptops, are capital items. But relief for the full cost can normally be claimed in the first year of use. This is because the expenditure will fall within the annual investment allowance.
• VAT
VAT on equipment requisite to the running of the business can be recovered.
Devilling Fees
• Self-Assessment Tax
A barrister may use a colleague to carry out research on a specific case. Such fees will be an allowable expense for the payer and will be taxable income for the recipient
• VAT
A VAT invoice will need to be issued by the barrister paying for the work. The VAT will be recoverable.