David Truman – Private Client and Barrister Expenses Specialist
We thought it would be useful to provide you with an overview of the taxation of your barrister trading income as an aide memoire. Below is some guidance as to the allowable and disallowable expenses you may incur in the course of your trade. The lists are based on tax legislation, decided court cases and HMRC guidance.
Any expense incurred wholly and exclusively in the course of your trade as a barrister will be deductible in calculating your business profits. The concept of wholly and exclusively needs to be considered in conjunction with the fact that certain expenditure has an inherent private element to it. This was demonstrated in the case of Mallalieu v Drummond, which found that whilst the barrister purchased her suit specifically to wear in court, it also served the purpose of warmth and decency. Hence, as there was a dual purpose for incurring such expenditure, the cost of the suits was disallowed.
Sometimes where costs are incurred for both a private and business purpose (for example a mobile phone subscription) the total expenditure can be apportioned. But in the case of something like a suit, at no point does it stop having a dual purpose, that is, it is never used solely for a business purpose and therefore is disallowed. Below is a list of expenses that we would expect to be deductible against your trading profits.
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Permitted barrister expenses
- Your Chambers rent
- Clerks fees
- Business use of home, a reasonable proportion (see below for further guidance)
- Phones and mobile phones (business use proportion only)
- Practicing certificate
- Indemnity insurance
- Business bank account charges (see below for further guidance on bank account charges)
- Data Protection Act payments
- Bar council and other relevant association subscriptions
- Printing and postage
- Accountancy and other professional fees
- Books *
- Subsistence – a reasonable amount (see below)
- Computer software
- Travel (normal commuting does not count, that is, your normal journey from home to chambers)
- Parking and petrol for business mileage (see below for further details regarding car expenses)
- Collars, bands and studs
- Costs of CPD training
- Books *
- Wigs and gown (but laundry costs are allowed as revenue)
- Suitcase trolley bags
- Laptops / IPADs, less any private use adjustment
*Your initial expenditure on books is capital but any replacement books will be revenue and therefore fully deductible.
Whilst these capital items are not a revenue deduction they should qualify for the 100% Annual Investment Allowance (AIA) and therefore you will get a deduction for these expenses assuming your total expenditure is within the annual limit which, for the period from 1 January 2019 to 31 December 2020 is £1million.
The acquisition of a car does not qualify for the 100% AIA, instead relief is given as follows:
- If the car is purchased either outright or on HP an annual allowance is given based on the cost of the car or the market value of the car when first used in the business and a percentage based on the CO2 emissions.
- Although cars cannot qualify for the 100% AIA they can qualify for a 100% allowance if a brand new car is purchased on or after 1 April 2018 with CO2 emissions below 50g/km or if the car is electric. The allowance will be clawed back when the car is sold up to the value of the proceeds received. This allowance is only available until 31 March 2021.
- Car lease payments are allowable subject to a 15% restriction for cars with CO2 emissions of 110g/km (for leases entered between 6 April 2013 and 5 April 2018 this was 130 g/kg and those entered into prior to 6 April 2013 this limit was 160 g/km. The old rules will continue to apply until a new lease is entered into).
- Repairs and insurance will also be deductible.
- Private use adjustments will be made to the capital allowances, lease restrictions, repairs and so on to take account of the fact that the car may not be used for business purposes 100% of the time.
None Tax Deductible Barrister Expenses
- Dinners at the inn
- Inns of court membership
- Costs of BPTC and interest on loans to pay for it.
- Clothing, for example, suits, shirts and so on
- Dry cleaning of suits, shirts and so on
- Entertaining – this includes solicitors and clients
- Normal subsistence (except on qualifying business journeys)
- Parking/speeding fines
- Payment of Tax and National Insurance
- Overdraft fees to fund private expenses
There is nothing in the legislation that dictates how to run your business. This leaves you to make your own business decisions. Therefore, if you want to travel first class, that does not preclude it from being an allowable deduction, if you want to take a taxi rather than public transport that is your decision.
Regular queries on barrister expenses
Below are detailed guidance notes regarding regular queries on certain items of expenditure that we regularly receive.
Unless you are still being taxed on the cash basis, then you will be taxed on work completed (work in progress) and fees raised (debtors) each year. It may later transpire that an invoice you raise will not be paid. At the point where you know you are not going to receive payment for a fee you are entitled to claim the fee as a bad debt, and hence as an expense against that year’s profits.
In order to claim a bad debt, the individual debt should be identified. A time delay between the date of raising the invoice and the date of payment may not be sufficient to class the debt as bad, particularly in Legal Aid cases. If you claim a fee as a bad debt but subsequently receive payment for it, you will be taxed on the later receipt.
Use of home
If you undertake work from home, then you may be able to claim relief for the additional household expenses incurred. The use of home as office deduction can be calculated as the total household running expenses (mortgage interest, council tax, utilities and so on) and then taking a suitable proportion of these. There is no set way to make the apportionment of the expenses but HMRC suggest that it should be done on an area and/or a time basis, as appropriate.
For example, if you use one room in your house out of ten rooms then you can take 1/10th of the expenses. Provided the office is not used extensively for private purposes as well then there is no need to take a time apportionment of the room costs as well. But if the room is also a bedroom for example, then you would need to apportion the costs between business and private use on a time basis. Please also bear in mind if a room in a house is used exclusively for business purposes a proportion of the capital gain on sale (apportioned in the same way, that is, on a time or room basis) would not fall within the exemption on sale of your main residence and a capital gains tax liability may arise.
The ideal scenario would therefore be to have a separate office which occasionally is used privately, perhaps by another member of the family or as a spare bedroom from time-to-time. This would allow you to claim the costs on an area basis and not fall foul of the exception from the main residence relief.
Ideally, we would use precise figures for the amount of rent paid and council tax, gas, electric and so on. It is possible to make a claim based on estimated figures but HMRC may ask to see back up of the figures in due course.
Bank interest and charges
When considering a claim for tax relief for interest charges incurred on overdrawn bank accounts it is necessary to look at each individual’s own circumstances. HMRC guidelines state that where the business is funded using borrowed money (including overdrafts) and that money is used for business purposes the interest charged is allowable as a deduction in computing the business profits. Interest is not an allowable deduction if the borrowing is used to finance private spending because more funds have been taken out of the business than have been put in or earned as profits. Hence if your personal drawings from the business exceed your profits you will not be entitled to an interest deduction.
Accordingly, on your tax return you will be able to include any overdraft interest that arises where you have gone overdrawn because the funds have been used to pay for your business expenses and the money you have drawn from the business for personal use does not exceed your accumulated profits.
If you are charged a fixed monthly fee for operating a business bank account then this fee is tax deductible. Interest paid on loans used to acquire assets for the business will be allowable. Loans taken out to fund tax liabilities are not considered to be for a business purpose and hence any interest arising will not be an allowable deduction.
Commuting from home to chambers is not a business journey. This is true regardless of whether you use part of your home as an office or not. Only journeys made to court and visiting clients will be allowable. If your chambers are around the corner from the courts/clients, HMRC will not allow the cost of the travel to the court/client as it is not a significant deviation from your normal commute. This applies for travel by both public transport and car.
In the case of a car we would ideally need to see petrol receipts for all your travel then apportion these based on a split of your mileage between business and private travel. This would be the ideal scenario but often it is unrealistic to keep accurate mileage logs and every petrol receipt. In these circumstances we would suggest that you at least keep a note of your business miles (if you regularly travel between your home/chambers and court then you may only need to measure this once and then keep a note of the number of times you do the journey). If you are claiming the cash basis of taxation (see below), or in certain other circumstances, then you can claim HMRC’s standard mileage allowance of 45p for the first 10,000 business miles and 25p thereafter.
There are a number of apps which allow you to monitor your business mileage for inclusion in your accounts.
The general rule regarding food is that it has an inherent private use and is not allowable. However, where allowable travel expenses have been incurred you are also allowed to incur a reasonable cost for lunch (and other subsistence). Hence, lunch on a normal day in chambers is not an allowable deduction, but if you are outside your normal place of work and it is significantly far away from your home/chambers then this is likely to be allowable. You are entitled to claim the expense of a drink with your bill, but if it goes past one or two glasses of wine or beer then HMRC may query whether it is genuine subsistence.
Client entertaining is not an allowable expense. In very limited circumstances you may be able to claim for part of a food bill if it is connected to qualifying business travel, as described above, and you happen to be with a client/business contact. For example, if you are away from home overnight on a case and meet a solicitor in the area for dinner, the proportion of the bill that relates to your food would be an allowable deduction. If you pay for the solicitors’ dinner this is not an allowable deduction. Any time you travel or make specific arrangements to meet a client/business contact for a meal would not be an allowable deduction. Hence in our example if you stayed overnight at a location just to meet the solicitor it would not be an allowable deduction.
If you would like a copy of our record keeping template to assist you with collating the basic information required to complete your income and expenditure statement which accompanies your accounts, please get in touch directly with Mary Kelly.
This can be used to help you put your information together in an easy to follow format but please feel free to use whatever means you find easiest to keep your records.
We are aware that many of you have smart phones and tablets so you may like to consider using an App to assist with your tax affairs. HMRC provide a list of Apps for people with simple accounts which you may find useful.
Please note – not all of these apps are free.
Historically it was standard practice for barristers to be taxed on the cash basis for the first seven years of trading before switching to the true and fair basis of taxation. New rules were brought in from 6 April 2017 to enable you to use the cash basis your turnover must be less than £150,000. Once you are on the cash basis however, you will only be required to move to the accruals basis once your turnover exceeds £300,000. At this point a ‘catch up charge’ will be calculated to ensure you are taxed on invoices raised but for which you have not yet received payment. Previously this catch up charge could be spread over ten years, but this is now six years.
By changing the way the cash basis applies to small businesses it has opened up the opportunity for those of you who have made the transition to the accruals basis of taxation to revert back to the cash basis if your turnover is below the cash basis threshold (£150,000). This may be useful for those of you going on maternity leave as it provides an opportunity to remain on the cash basis until your income levels increase above £300,000.
VAT & Making Tax Digital
From April 2019 all businesses with turnover over the VAT Threshold (currently £85,000) are required to maintain digital records as part of Making Tax Digital. This means that you will need to file VAT accounts on a quarterly basis using software not provided by HMRC.
We expect this to be rolled out to self-assessment income tax in due course after April 2020.