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.
You should ensure that court proceedings are always viewed as an enterprise to be undertaken only after a thorough risk assessment. Foremost in that process being a cost/benefit analysis.

Whilst successful litigation can bring significant rewards 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 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. But, 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, then according to HMRC you can claim the legal costs of removing a tenant from your property. But, you can’t claim the costs of a dispute concerning your property only, such as a boundary dispute or action relating to its purchase.

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 to be set off against tax will depend on the facts of the case and your circumstances. The best way to answer the question is to work with me and your accountant.

This article is intended only as a brief summary of some issues regarding s994 petitions and should not be relied on as legal advice.

If you have a dispute, which you believe falls within the subject of this article please contact me to discuss the matter further.

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