Can You Set Off Litigation Costs Against Your Tax Liability?

Sole traders, partnerships and limited companies can all set off business expenses against their liability for either income tax or corporation tax.

Successful litigation can bring significant rewards. However, the costs of running a case can become a substantial expense. Working out whether these costs are an expense that can be set off against a tax liability has obvious financial benefits.

The basic position of HMRC is that for an expense to be set off against a tax liability, it must be incurred wholly and exclusively for the purposes of your trade or profession. Whether litigation falls within this definition depends upon the type and subject matter of the court proceedings. For example, if you are a private landlord, according to HMRC you can claim the legal costs of removing a tenant from your property as a business expense, but you can’t claim the costs of a dispute that concerns your property only. For example, a boundary dispute or professional negligence action against your conveyancing solicitors.

Confused? You’re not the only one. The case of Meredith v Roberts [1968] was a claim to set off the costs incurred in running a PAYE scheme. The case was lost, as was the subsequent claim to have the litigation costs set off as an expense. The losing claimant was a solicitor.

As HMRC says, you need to establish the facts. Whether or not the costs of a court action will be considered as an expense that can be set off against a tax liability will depend on the facts of each case and your circumstances.

We believe that litigation should be viewed as an enterprise to be undertaken only after a thorough risk assessment. Establishing the true cost to you or your business, is obviously essential. We would be happy to talk to you and your accountant to help you work out the likely cost of proceedings.

Please feel free to contact us either by telephone or email or by using the ” Let’s Talk” button on this website.

If you would like to know more about the costs of a litigation matter, please use the following link to the page on our website;  How Much and How Long ?