If your business has been hit by a penalty from the Companies House just because, you sent your accounts late, can you take it as a tax deductible expense?. The answer is that fines and penalties cannot be taken into the tax deductible category unless they are being paid on behalf of an employee.
There are certain conditions that an expense has to meet to qualify for a tax deduction Fore and foremost, it must be “incurred wholly and exclusively for the purpose of the trade”. The “wholly” condition refers to the costs and “exclusively” refers to how the purchase is used in the business.
Where an expense serves two purposes, even where it is mostly for business, the condition isn’t met and none of it qualifies for a tax deduction. This can be seen as very unfair in certain situation, but unfortunately that is the way the tax rules work
Right and fair deduction
It may seem that it is right and fair for a company to claim costs that they incurs to meet its legal obligations should be deductible, and the good news is that HMRC won’t usually argue about this. But on the otherhand you can also argue that a fine is a legal obligation, so both fees and fines should either qualify for a tax deduction or they shouldn’t.
Interpretation of the court
There is one case where a leading judge was bold enough to state that a fine is intended as a punishment, and it would be unfair if other taxpayers had to foot part of the bill. This makes sense to us but you won’t find it written in the tax rules.
If your business had been hit by a penalty and if you are unsure of how to treat this, it is best to get in touch with professionals. Contact your local accountant so that they will advise you on the best possible course of action. We at KVS Accountants have dealt with many such cases and out tax consultants are always here to help you. Contact us on 020 7731 6131 for a free no obligation tax consultative session. KVS Accountants serve act as accountants in Putney, Fulham, Wimbledon, Wandsworth, Barnes, Kensington and Knightsbridge