an expense will be deductible arriving at the taxpayer's trading profits only if :
(1) It is an income and not a capital expenses
(2) It is incurred wholly and exclusively for the purpose of the trade (3) Its deduction is not prohibited by statute
Expenses are only deductible from trading income by implication from the charging sections which impose tax on " profits" and from ITTOIA 2005 part 2
these rules are more generous than under the employment income previous in ITEPA 2003
A distinction is drawn between expenses incurred in earning the profits ( which may be deductible) and expenses incurred after the profits have been earned, which are not deductible. for example, the payment of income tax is an application of profit which has been earned and is , therefore , not deductible . other taxes, such as rates and stamp duties, may be paid in the course of earning the profits and so may be deductible
expenditure that would have been deductible if the trade had not discontinued may be offset against post-cessation receipts . relief against total income is available for certain payments made by an unincorporated business within seven years after cessation. relief is given for the year in which the payment is made and unused relief cannot be carried forward . payments qualifying for relief are those made wholly and exclusively to remedy defective work done, goods supplier or services rendered or by way of damages for defective work; to insure against claims and to collect debts of the former trade.
the expenditure provisions also apply to debts of the business which are, after discontinuance, shown to be bad. the relief must be claimed and is given against income if the year of assessment in which the expenditure is incurred althoug the taxpayer may claim for the excess be treated as an allowable capital loss of the same year if there is insufficient income in that year .
similar tests are applied for classifying expenditure as income or capital those for deciding whether a receipt is income or capital hence, a distinction is drawn between the fixed and the circulating capital of the business. a payment is capital if it is made to bring into existence an asset for the enduring advantage of the trade . the asset may be intangible as in where a payment by a credit card company to preserve its goodwill was held to be a capital payment
a once and for all payment , even though it brings no enduring asset into existence, is more likely to be a capital nature than a recuring expenses. payment made by the termination of their tenancies were held to be capital, because their purpose was to render capital assets (the premises) more valuable
capital expenditure is not allowable as a deduction in computing the profits of a trade whether expenditure is of a capital nature is ultimately a question of law to be determined in the light of the facts of an individual case .
there is no single test to applied in distinguishing capital from revenue expenditure. for determing profit for accountancy purpose, the important issue is whether expenditure is " consumed" ie used up , and, therefore, when it bring into existence an asset or advantage for the enduring benefits of the recent cases which considered this issue
enduring benefits and this test is still widely used the following capital -related expendses are also disallowed
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