We have found over the years that an area which causes some confusion to taxpayers is the question of expenses and what can/cannot be claimed. In this regard we have set out below a summary of the criteria which must be considered when deciding whether an item is/is not deductible. This has been broken down into self employed taxpayers and employees as the rules are different for both groups.
Self employed
In order for expenditure to be allowed in computing the profits of a self employed individual for an accounting period it must be:
- Revenue in nature and not capital,
- incurred wholly and exclusively for the purposes of the trade
- Not specifically disallowable
As mentioned above for an expense to be allowable it cannot be of a capital nature. Neither revenue nor capital is defined in the Income Tax Acts. As a result there has been numerous tax cases on this subject and a number of broad principles have emerged which can help in deciding whether a receipt is of a revenue or capital nature.
- Payments for the sale of the assets of a business are generally capital receipts
- Payments in lieu of trading receipts are income receipts.
- Payments of a recurring nature are usually treated as income receipts
- Payment made in return for the imposition of substantial restrictions on the activities of a trade are of a capital nature
In addition to the above there are some items of expenditure which are specifically disallowed under the Tax Acts when computing annual profits, including:
- Client entertainment expenses
- Private expenses
- Provisions for repairs
- Creation or increase of general provisions
- Interest on late payment of tax
Employees
The situation for employees is more rigorous than for self employed individuals. Section 117 TCA 1997 imposes a charge to tax under Schedule E in respect of expense payments to employees. In order for an expense to be deductible it must be “wholly, exclusively and necessarily incurred in the performance of the duties” of the office or employment. This contrasts with the situation for self employed individuals where the expense must only be wholly and exclusively incurred in order to be allowable.
Some examples of allowable expenses are as follows
- cost of special clothing worn in performance of duties
- cost of tools used in performance of duties
- cost of books and newspapers is allowed to journalists
In addition to the above where employees incur motoring or subsistence expenses in the performance of their duties of employment they may be entitled to tax free reimbursement of these amounts as set out in Revenue leaflets IT51 (subsistence) and IT54 (motoring), see www.revenue.ie. It should be noted that the provisions as set out in IT51 & IT54 only relate to employees/directors chargeable to tax under Schedule E (PAYE), they do not apply to self employed individuals.
There are numerous conditions which must be met and also detailed records which must be kept in order to fulfill the requirements as set out by Revenue. Additionally there are different rates of reimbursement depending on the circumstances involved. This is an area where particular attention should be paid as it regularly features in PAYE audits and the resulting liabilities can be quite substantial.
If you would like more information on any of the issues as set out above please contact us.