Below we provide an outline of some of the expenses barristers can deduct from their trading income for tax purposes, some expenses that are specifically not allowable, and also provide some further information. The below is aimed at a self-employed barrister. The rules are similar for barristers running through a limited company, but there are some differences, and specific advice should be sought where appropriate.
In the case of TN Accountancy’s clients, we review expenses in detail, as well as providing wider tax advice and tax planning based on individual circumstances, which goes beyond what is included in this article.
If you would like to have a free, no-obligation consultation to find out how you can maximise your tax efficiency, or even about preparing your annual accounts and tax returns, please contact us.
Generally, expenses are tax deductible if they are incurred ‘wholly and exclusively’ for the purpose of an individual’s trade as a barrister. There are inevitably a number of expenses that have an element of private use. In most cases (such as the monthly cost of a phone contract), the expense can be apportioned between business use and private use. The following are examples of common tax deductible expenses for barristers:
Printing, postage & stationery
Travel (see below)
Hotels and subsistence (see below)
Wigs & gown, and associated laundry costs
Collars & studs
Chambers rent and clerks fees
Relevant professional subscriptions
Use of home (see below)
Professional and accountancy fees
Please note that some of these expenses are capital in nature, but should qualify for the 100% Annual Investment Allowance.
Use of Home
If an element of an individual’s work is undertaken at their home, relief can be claimed in respect of an element of household expenses. This can be done either by taking a proportion of the household expenses and deducting these from profit, or by claiming a fixed flat rate deduction.
When looking at the household expenses, individuals can add up the various costs (mortgage interest, utility bills, council tax, rent etc.) and divide these either on a time basis or by a floor area basis, based on the number of rooms in the house and the proportion of private use of the specific room used for work.
An example would be if an individual has a house with 5 rooms, and one was used mostly/exclusively for work, then 1/5th of the household costs would be deductible. If this room was used 50% for non business purposes, then 1/10th of the household costs would be deductible. Please note that if a room in a house is used exclusively for business purposes, a proportion of the capital gain on the sale of the house (apportioned in the same way, on a time or floor area basis) would not fall within the PPR exemption on the sale of the property and a capital gains tax liability may arise.
A good compromise would be to have a specific office which occasionally is used privately, such as a spare bedroom for occasional guests. This would allow a claim for the costs on a floor area basis and should preserve the PPR relief for capital gains tax purposes.
The flat rate deduction referred to above replaces all household costs (note that this does not include telephone and internet costs – these can be claimed in addition to the flat rate deduction) and the amount that can be claimed depends on the number of hours an individual works from home on a monthly basis:
25-50 hours - £10 per month
51-100 hours - £18 per month
101 or more hours - £26 per month
Travel expenses are allowable insofar as the travel is business travel. Commuting from home to chambers does not constitute business travel; only travel to court and visiting clients is allowable for these purposes. Please note that if chambers are close to a court or to a client, then travelling to the court/client is not allowable given this is very similar to commuting to chambers.
The Samadian case, related to the tax deductibility of travelling expenses, went to the Upper Tribunal, and gave some clarification on travel expenses:
Travel expenses for journeys between places of business for purely business purposes are treated as deductible.
Travel expenses for journeys between a location that is not a place of business and a location that is a place of business are not deductible.
Travel expenses for journeys between home (even where the home is used as a place of business) and places of business are treated as non-deductible.
Travel expenses are treated as deductible in relation to itinerant work (such as attending a court that an individual barrister does not regularly attend).
The key issue seems to be whether a journey is habitual or itinerant, and this judgement will need to be made on a journey-by-journey basis, and robust records should be kept.
If an individual barrister uses their car for business purposes, they can also claim either business mileage at a flat rate or can claim capital allowances on the cost of the car, and can deduct the cost of any lease payments and any running costs, all apportioned for any private use.
Where allowable travel expenses have been incurred, individuals can also incur a reasonable cost of food and drink, provided they are outside their normal place of work, significantly far away from chambers or home and are on business.
Expenses not Allowable as a Deduction
Here are some expenses typically incurred by barristers that are not deductible for tax purposes:
Membership for Inns of Court
Inns of Court dining
Life insurance premiums
Clothing and associated laundry
Below are a few additional points to consider.
Barristers’ Cash Basis
It had long been standard practice for barristers to be assessed on the cash basis for the first 7 years of trading, before switching over to the normal accruals basis of taxation.
From 6 April 2013 however, the cash basis for the first 7 years no longer applied, but a wider cash basis for self-employed individuals (not just barristers) was introduced.
Individuals can elect to be assessed on the cash basis, if their turnover is is below £150,000 (but must leave the cash basis once their turnover exceeds £300,000), but it is common practice for barristers to be assessed on the accruals basis, even if their income is below these levels.
Once the change from the cash basis to the accruals basis is made, there is a ‘catch-up charge’ to align the two methods of assessment, and this charge can be spread over 6 years.
Tax Allowances and Other Reliefs
As well as ensuring as many expenses are deducted from income for tax purposes, there is usually a huge opportunity to reduce an individual’s tax liability by making use of allowances and looking at wider tax planning. This includes making use of pension contributions, ISA allowances, Capital Gains Tax allowances, Inheritance Tax allowances, as well as potentially looking at tax efficient investments.
More information can be found in our blog post from earlier this year.
Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.