Question

(2) Professional fees:

Audit and accountancy

Cost of successful tax appeal

Legal fees re collection of bad debts   

Cost of defending action by a former employee for sexual harassment

Architect’s fee for designing a new Warehouse which was not used   

Kindly indicate those that are allowable expenses and those that are disallowable expenses

  

Answer 1

Professional fees may be incurred for a variety of reasons and can include fees charged by accountants, lawyers, architects, consultants to name but a few. In deciding whether it is permissible to deduct professional fees in computing taxable profits it is necessary to establish not only whether the fees were incurred wholly and exclusively for the purposes of the business, but also whether the items to which they relate are capital or revenue in nature.

Professional fees are capital in nature to the extent that they are incurred in relation to capital expenditure. For example, fees in relation to the following would be disallowed in computing profits on the grounds that they represent capital rather than revenue expenditure:

• Cost of defending action by a former employee for sexual harassment
• Legal fees re collection of bad debts

There are many commercial reasons why professional fees may be incurred and in respect of which a deduction against profits is permitted. A prime example is fees incurred for the preparation of accounts, tax computations and returns. However, a deduction is not allowed for the fees associated with dealing with a tax investigation, unless the investigation does not find anything to be wrong.

• Audit and accountancy
• Cost of successful tax appeal
• Architect’s fee for designing a new Warehouse which was not used