Contact us

Map

 01332 202660

email

background

OUR

PROCESS

GET IN TOUCH
WITH US

GET TO KNOW

US

BLOG

SHARE

SHARE

CONNECT

CONNECT

POST

POST

DISCUSS

DISCUSS

       Services

61 Friar Gate  Derby  DE1 1DJ

 

Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
Phone

01332 202660

Blog

Legal and professional fees – Capital or revenue?

Adrian Mooy - Tuesday, January 21, 2020
 
At some point, a landlord is likely to incur legal and professional fees in connection with the running of their property rental business. It is easy to fall into the trap of assuming that these costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story. The landlord must also determine whether the costs are revenue or capital in nature. The rules also differ depending upon whether the accounts are prepared on the cash basis or using traditional accounting under the accruals basis.

 

The rule

 

The nature of the legal fees follow that of the matter to which they relate – so if the fees are incurred in relation to an item which is itself revenue in nature, the legal and professional fees are also revenue in nature. Likewise, legal fees that are incurred in connection with a matter that is capital in nature are also capital in nature.

 

Legal fees that are revenue in nature would include, for example, fees incurred to recover unpaid rent, while legal fees that are capital in nature would include fees incurred in connection with the purchase of a property.

 

Cash or accruals basis

 

Revenue items are deductible in computing profits regardless of whether they are prepared under the cash or accruals basis, although the time at which the relief is given will differ. Under the cash basis, the deduction is given for the period to which the expenditure relates, for the cash basis the deduction is given for the period for which the expenditure is incurred.

 

For capital expenditure different rules apply. No deduction is allowed for capital expenditure under the accrual basis, whereas under the cash basis, the treatment depends on the nature of the item – capital expenditure is deductible under the cash basis unless the expenditure is of a type for which a deduction is expressly forbidden. Items of the forbidden list include expenditure in or in connection with lease premiums and the provision, alteration or disposal of land (which includes property).

 

Example of allowable revenue items

 

A deduction for legal and professional fees will normally be allowed where they relate to:

 

 • costs of obtaining a valuation

 

 • normal accountancy costs incurred in preparing accounts of the rental business and agreeing the tax liabilities

 

 • costs of arbitration to determine the rent

 

 • the costs of evicting an unsatisfactory tenant to re-let the property

 

Example of capital expenses

 

The following are examples of legal and professional fees which are capital in nature:

 

 • legal costs incurred in acquiring or adding to a property

 

 • costs in connection with negotiations under the Town and Country Planning Act

 

 • fees incurred in pursuing debts of a capital nature, such as the proceeds due on sale

 

Leases

 

Leases can be tricky. The expenses incurred in connection with the first letting or subletting for more than one year are deemed to be capital and therefore not deductible – this would include the legal fees incurred in drawing up the lease, surveyors’ fees and commission. However, if the lease is for less than one year, the associated expenses can be deducted. Normal legal and professional fees on the renewal of a lease are also deductible if the lease is for less than 50 years; although any proportion of the fees that relate to the payment of a premium are not deductible.
If a new lease closely follows the previous lease, a change of tenant will not render the associated fees non-deductible. However, if the property is put to other use between lets, or a long lease, say, replaces a short lease, the associated costs will be capital and non-deductible.

 

Comments
Post has no comments.
Post a Comment




Captcha Image

Trackback Link
http://www.adrianmooy.co.uk/BlogRetrieve.aspx?BlogID=13995&PostID=813837&A=Trackback
Trackbacks
Post has no trackbacks.

News