Tax treatment of advertising
Posted by Christie Malry on October 5, 2011 at 9:05 pm
Ritchie is never one to let the facts get in the way of his prejudices at the best of times.
Aw, that's not very nice. And it's not very accurate either, betraying one of Ritchie's core values - that everything any business or individual earns belongs to the state until the state, in its great and infinite wisdom, deigns to gift back to the business/individual.
That's not the way that HMRC sees it, however. HMRC has a handy guide for people starting out in business. This says:
Allowable business expensesBroadly speaking, you can deduct from your turnover all the costs you incur for the sole purpose of earning business profits. But you cannot deduct costs which you incur for a non-business purpose, such as your own personal expenses or drawings. And you cannot deduct capital costs, that is, the cost of buying fixed assets or intangibles, such as goodwill, which last for several years (or losses you suffer when you sell them). But you may be able to claim capital allowances (see page 8) for these capital costs. Additionally, you cannot deduct costs which are recoverable under an insurance policy.
From this, it's easy to see that because advertising is a cost incurred for the sole purpose of earning business profits, it's an allowable deduction in determining the business's taxable profit. Conversely, directors' entertaining isn't incurred for the sole purpose of earning business profits, because it has an additional advantage for the director himself. It's therefore specifically disallowable as a deduction in arriving at taxable profit. Of course, if both were incurred by the business, they would be deducted in arriving at the company's accounting profit.
While not all business expenses are allowable deductions for establishing taxable profit, it's HMRC's intention that most of them are. So, it's really a bit daft to suggest that Simon doesn't understand the determination of taxable profit when it looks for all the world like he does.
Advertising is definitely a legitimate business expense for tax purposes. At least I sincerely hope so. My accountant has been deducting my advertising expenditure (Yell.com etc) from my taxable profits for years. I really wouldn't like to think he'd made a serious mistake!
The rudeness displayed in Richard Murphy's response to Simon is similar to that which I have experienced. Murphy likes to dish it out but woe betide anyone who speaks to him like that!
Talking about "tax relief" in relation to a business expense doesn't make sense.
The basic taxable thing is the profit, i.e. income minus expenses. Yes, there may be a few differences between 'profit' for accounting and tax purposes, but we're still taxing the profit.
A tax relief is something that reduces the tax below what it would normally be on those profits. It only makes sense to call the deductibility of advertising a tax relief if you think that the basic taxable thing is the gross income. Which it isn't.
And a bit of trivia - entertaining was made non-deductible by statute after the Revenue lost a court case, which held that it could be a legitimate business expense and so deductible under general principles.
I don't like Murphy but surely Simon, by saying "Richard Murphy thinks advertising gets tax relief" implies that Simon thinks that advertising is a disallowable expense, when of course it is allowable.
"A tax relief is something that reduces the tax below what it would normally be on those profits"
I'm not sure that's correct. Something that reduces the tax below what it would normally be is called a "tax reduction" in the legislation. For example, EIS, VCT, married couple's allowance, alimony maintenance payments.
It has long been the case that when people get a deduction for something in computing their income/profits, one will say they receive "tax relief" on it. After all, I would assume you would agee that one gets "relief" for pension contributions (even though they are effectively deducted from total income).
Not that he needs me to put words in his mouth, and I'm sure he will drop by to spit them back at me, but I suspect Simon is disputing that it's a tax "relief". We don't think of cost of sales or employee wages as a "relief", so why advertising?