Legal Costs of Defending Director Not Tax Deductible

To what extent are the costs of professional advice given to a director tax deductible by the company that he or she serves? A tribunal tackled that thorny issue in a case of importance to company directors and their tax advisers.

A director of a computer consultancy company was accused by his former employer of removing confidential information, breaches of confidentiality and fiduciary duties, and defamation. Proceedings were issued and, although the claim against him ultimately failed, very substantial legal costs were incurred.

The bills for his legal representation were all addressed to him personally and made no mention of the company for which he worked. They were nevertheless paid by the company, which claimed back the VAT element of the invoices. HM Revenue and Customs (HMRC) refused the claim, but the company succeeded in an appeal to the First-tier Tribunal (FTT).

In upholding HMRC's challenge to that ruling, the Upper Tribunal noted that the company was never a party to the litigation and that the FTT had failed to ask itself whether it was contractually obliged to pay for the legal services concerned. There was in any event no direct or immediate link between the professional fees incurred in successfully defending the director and the taxable activities of the company.