Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 6

Computational provisions: general

81 General rule as to deductions

Summary

The general rule is that tax under Cases I and II of Schedule D is charged without any deduction other than a deduction authorised by the Tax Acts. Despite this the Acts do not, with a number of exceptions, indicate precisely what deductions may properly be made from the receipts in computing the income of a trade. This section provides that no deduction may be made for a range of specified items.

Details

(1) Tax chargeable under Cases I and II of Schedule D is charged without deduction, other than such deductions as are specifically allowed by the Tax Acts.

Non deductible amounts

(2) In computing the income of a trade or profession for tax purposes, no sum is allowed to be deducted for –

  • (2)(a) any sum not wholly and exclusively laid out for the purposes of a trade or profession,
  • (2)(b) any sum expended for a private or domestic purpose,
  • (2)(c) the rent of any dwelling house or other domestic premises except such part as is used for the purposes of a trade or profession,
  • (2)(d) any sum expended on the repair of premises used for the purposes of a trade or profession, or on the repair of trade tools, etc, over and above the amount actually spent on such repairs,
  • (2)(e) any loss not connected with the trade or profession,
  • (2)(f) any capital withdrawn from, or any sum used or intended to be used as capital of, the trade or profession,
  • (2)(g) capital used in improving premises occupied for the trade or profession,
  • (2)(h) any interest which might have been made if any such sums had been laid out at interest,
  • (2)(i) any debts, except proven bad debts and doubtful debts to the extent that they are estimated to be bad (in the case of bankruptcy, the value of the debt is to be taken as the amount which may reasonably be expected to be received for it),
  • (2)(j) any average loss beyond the actual amount of the loss after adjustment,
  • (2)(k) any sum recoverable under an insurance contract or a contract of indemnity,
  • (2)(l) any annuity or other annual payment (apart from interest) payable out of the profits/gains of the trade or profession,
  • (2)(m) any royalty payable in respect the user of a patent,
  • (2)(n) any share-based consideration given by a company either for goods or services or to its employees or directors. The rule applies whether the shares are shares of the company itself or a connected company. The paragraph also requires that certain deductions which are currently tax deductible remain deductible. These include payments at market value made by a company to another company to issue shares to the first company’s employees, the purchase of shares at arm’s length by a company for its employees and the payment by a company to a connected company to issue share options to its employees. The latter deduction is subject to the rule that the expenditure must be incurred for genuine commercial reasons and not as part of any tax avoidance scheme,
  • (2)(o) any amount paid or payable under a contract to a connected person as compensation for a transfer pricing adjustment in another jurisdiction,
  • (2)(p) any taxes on income.

This subsection maintains the status quo in relation to the tax deductibility of interest and of expenditure on research and development.

IFRS

(3)(a) It is specifically provided that interest payable by a company, and expenditure on research and development incurred by a company will not be prevented from being deductible in calculating taxable trading income simply because, under IFRS, it is included for accounting purposes in the cost of an asset. Under IFRS, such costs may have to be included in the cost of an asset rather than being treated as an expense. Consequently, they would not appear in the accounts as an expense in earning profits. The subsection ensures that they will continue to be deductible for tax purposes. Where expenditure on research and development is amortised, the deduction for tax purposes in respect of that expenditure will be made in accordance with the amortisation.

(3)(b) The application of this rule should not result in a double deduction. That could arise where an amount is included under IFRS as part of the cost of an asset but a deduction had already been given for that amount in an earlier accounting period in computing taxable income. In such a case, a second deduction will not be due.

Impairment Losses

(4) Doubtful debts to the extent that they are respectively estimated to be bad, referred to in (2)(i) is defined for corporation tax purposes as impairment losses calculated in accordance with generally accepted accounting practice as defined in section 4 (interpretation of corporation tax acts). This subsection confirms that impairment losses calculated in accordance with IFRS or GAAP will be deductible for corporation tax purposes for accounting periods beginning on or after 1 January 2018.

Capital v Revenue

The accounting treatment of an item of expenditure will not automatically convert revenue expenditure into capital expenditure, or vice versa, for tax purposes. The fact that expenditure is charged to fixed assets may lend support to an argument that the expenditure is capital expenditure for tax purposes. However, if on tax principles the expenditure is of a revenue nature, charging it to capital does not make it capital expenditure for the purposes of tax.

Where expenditure which is revenue in nature and deductible for tax purposes is spread over the accounts of more than one year in accordance with relevant accounting standards, the tax deduction will also be spread in accordance with the accounting treatment.

The remaining sections of this Chapter provide for specific allowable deductions in computing the profits/gains of a trade. Moreover, further deductions are authorised by sections 102 (deduction in respect of premium paid in respect of leased premises), 127 (restrictive covenants), 324, 333, 345 and 354 (double rent allowances for certain business premises), 517 (payments to trustees of profit sharing schemes), 519 (expenses incurred in establishing, and payments to the trustee of, an Employee Share Ownership Trust), 758 (fees and expenses incurred in obtaining, or extending the term of, a patent), 764 (expenditure on scientific research), 768 (expenditure on acquiring “know-how”) and 774 (contributions to approved superannuation schemes).

Relevant Date: Finance Act 2020