A guide on whether limited company directors can ‘do a Reeves’ — claim back the cost of accountancy fees.
Although now in charge of the nation’s finances, it has emerged that the Chancellor, Rachel Reeves, has previously enlisted a tax adviser’s help to prepare her tax returns.
Furthermore, Reeves (along with a number of other MPs) has claimed back the cost of these fees for tax advice through expenses – a reported total of £1,225.00 writes chartered accountant Lisa Somerton, tax manager at Jenner Accountants Limited.
Reeves didn’t break rules by claiming for tax advice
Although technically within the rules for parliamentary expense claims, many will view our chancellor claiming for tax advice as ironic, at best, given that many hard-working taxpayers fund tax advice and accountancy fees themselves, from their own pockets.
And contractors, yes, I am looking at you!
Complexity, and how an accountant can help you clear it up
Despite ongoing efforts towards tax simplification, the tax system can be complex. Most taxpayers don’t have time to develop detailed knowledge of the legislation that affects them, and the use of a tax adviser can bring some reassurance that their tax affairs are up-to-date and correct.
In Rachel’s case, a minor mistake or omission on a tax return could lead to some embarrassment, much to the delight of the Conservatives, who are now in opposition.
Are expenses rules for Rachel the same for you and your tax return?
Perhaps there’s already enough for them to object to it. After all, Rachel received a refund of the annual tax advice costs she incurred by reclaiming them — in full — as a parliamentary expense.
But what are the rules on expensing tax advice for limited company owners? Can fees for tax return help be re-claimed through a contractor’s limited company?
Is the cost tax-deductible?
Tax relief is available on company expenditure if the cost is incurred “wholly and exclusively” for the purpose of the company’s trade.
HMRC considers that in general, fees relating to a director’s personal tax return, or advice regarding personal tax issues, are not wholly and exclusively incurred for the company’s trade. And therefore, fees incurred for such personal tax assistance are not deductible against the company’s trading profits.
The issue of the invoiced party
Next, let’s consider whether the accountancy fees or tax adviser’s bill has been invoiced to the limited company, or to the director personally.
Generally speaking, the party who is billed for the tax advice will be dependent upon the engagement terms with the accountant/adviser.
Accountancy fee invoiced to the individual
If the cost of tax return tips and help has been invoiced to an individual running a limited company (also known as a Personal Service company), then it is payable by the individual and not the company. These costs cannot be reclaimed through an expenses claim.
In addition, relief cannot be claimed on the tax return itself, as the cost is not incurred wholly, exclusively and necessarily in the performance of the director’s duties.
Accountancy fee invoiced to the company
Where the limited company has been invoiced for accountancy services by the accountant or adviser, the company will pay the fee directly.
Be aware, when a company pays for a director’s personal cost, this becomes part of the director’s remuneration package and is subject to national insurance.
The cost of the service would need to be reported as a benefit-in-kind on a P11D. The director would pay tax on the benefit and the company would pay national insurance.
Accountancy fees as a limited company /personal service company
The cost of a limited company’s accountancy fees, along with corporation tax computations and returns, are incurred wholly and exclusively for the purpose of the business, and therefore are tax-deductible.
Some accountancy firms issue an annual invoice covering their services, without separately identifying the cost of the self-assessment tax return as an additional charge.
No charge for a personal tax return? Possibly
In many cases, where the director’s tax return is straightforward, the accountancy firm will not charge an additional fee for preparing it.
In this case, the annual fee is likely to be fixed whether or not the tax return is being prepared, and as such the accountancy fee would be tax deductible in full.
The same follows for any other costs or special advice — the contractor (or their accountant) will need to consider whether the cost relates to the trade of the company, to determine whether it is a tax-deductible expense.
What does tax relief mean, in practice?
Remember, the availability of tax relief in the company does not mean that you are reimbursed in full for the cost (unlike Rachel Reeves who received a full reimbursement).
Rather, the cost is deducted from taxable profits, and the company will receive relief at its marginal rate of tax.
At current rates, this could be 19%, 25% or 26.5% depending on profit levels for the year in which the expense is incurred.
A parliamentary perk?
As we have established, the cost of tax advice is not deductible against employment income when calculating the tax liability for the majority of employees.
A review into parliamentary expenses as far back as 2009 recommended that MPs should no longer be entitled to claim for accountancy costs to help fill out tax returns.
The recommendations were not taken up, and MPs have continued to claim for these costs.
But this is permitted as long as they relate to parliamentary duties.
Rachel has now fully repaid the tax return advice she expensed
For the record, Rachel has reportedly repaid the £137.50 she claimed for last year’s tax advice.
But millions of taxpayers meanwhile have to navigate the tax system, and its long delays to access HMRC helplines, without any financial compensation.
Perhaps it is time for a more level playing field, instead of one rule for the taxpayer and another for the government and specifically, the Treasury’s very own boss?
All eyes back to Rachel…
Either way, we recommend that you be across what’s announced by the chancellor a week from today, when she will invariably unveil even more reasons for you to feel like tax return advice should be a cost you can expense, but very, very often isn’t.
Finally, some PSCs reading this article might be tempted to now call up their accountant and request that their accountancy fee is in future billed to the company, not them as an individual! Your accountancy firm might even agree to this, but be aware, where the fee relates solely to you as the individual, there would be a taxable benefit if the service is then paid by the company.
Therefore, this course of action is not recommended because the tax/NI cost is likely to be higher than taking an extra dividend to cover the fee. That all may change next week though, moments after our chancellor gets to her feet!
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