Legal Fees Allowable Against Tax

When a family partnership faced a legal challenge, the partners argued that the legal costs involved were allowable business expenses.

The partnership spent more than £36,000 on legal fees defending a claim that the sister of one of the partners was also a partner in the business.

The claim was dismissed by the court. In the relevant set of accounts the costs were treated as business expenditure and deducted from the profits for the purposes of calculating the taxable profit.

HM Revenue and Customs (HMRC) disputed the right of the partners to deduct the legal costs, arguing that ‘a partner in the business had paid legal fees to defend his interest against his sister, and that did not constitute an expense incurred for the purpose of the trade’.

However, the First-tier Tribunal concluded that ‘the purpose of the disputed legal fees was to preserve the assets and trade of the Appellant partnership, that expenditure was revenue in nature, and also incurred wholly and exclusively for the purposes of the partnership’s trade’.

Accordingly, HMRC’s argument was rejected and the expenses confirmed as allowable deductions for calculating taxable profits.

It is likely that this decision will be appealed by HMRC.