Professional fees cover the outside experts a business relies on: accountants, auditors, solicitors, consultants and specialist advisers. They are mostly ordinary deductible overheads, but a handful of situations change the treatment completely, so the accounts should make them easy to spot.
Suggested accounts
| Account | Typical content |
|---|---|
| Accountancy fees | bookkeeping support, management accounts, annual accounts and tax returns |
| Audit fees | statutory audit, kept separate because the accounts disclose it when there is an audit |
| Legal fees – trading | contracts, debt recovery, employment matters, trademark renewals |
| Legal fees – capital | buying or selling property, shares or a business (not expensed) |
| Consultancy and advisory | IT consultants, HR advisers, business coaching |
When legal fees are capital
Legal and professional costs connected with acquiring or disposing of a capital asset are part of that asset’s cost or the disposal calculation, not an overhead. Examples:
- conveyancing and stamp duty land tax on buying premises go to the property’s cost;
- legal fees on granting or taking a new lease of more than 50 years generally follow the capital treatment, whereas renewing a short lease is usually revenue;
- due diligence on buying another company forms part of the investment’s cost.
Costs of raising share capital are charged against share premium where available, not the profit and loss account. Legal fees to defend the business’s existing trade, recover debts or draft customer contracts are revenue and deductible.
The year-end accrual
The accountant’s fee for preparing this year’s accounts is incurred after the year end but relates to it. Most companies accrue an estimate:
| Account | Debit | Credit |
|---|---|---|
| Accountancy fees | £2,400 | |
| Accruals | £2,400 |
When the invoice arrives the next year, it is posted against the accrual. Any over- or under-accrual falls in the new year, so base the estimate on the engagement letter rather than last year’s bill.
Personal work is not a company expense
If the company pays for a director’s personal tax return or personal legal matter, the cost is not a business expense of the company. Either charge it to the director’s loan account or treat it as a benefit in kind; either way the director or the company has a tax consequence to report.
Reclaiming VAT on professional fees
The business can only reclaim VAT on services supplied to the business. The invoice should be addressed to the company, for work done for the company. Fees paid on behalf of someone else (a director, a tenant, an insurer settling a claim) are not the company’s input tax, even if the company pays them. Overseas advisers invoicing without VAT trigger the reverse charge for a VAT-registered business.
Consultants who look like staff
A consultant working full-time for one client through a personal company may fall within the off-payroll working rules. Medium and large clients must decide the worker’s status; small companies leave the decision to the worker’s company. Keep the status assessment with the contract.
For other period-end estimates see accruals and prepayments, and for choosing who does what, bookkeeper vs accountant.