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ACCA Applied Skills · Taxation (UK) · Income from self-employment

Hannah is a sole trader who prepares accounts to 31 March 2026. Her accounts show the following expenses: legal fees of £2,000 for renewing a 5-year lease of her shop, legal fees of £3,000 for defending a claim by a customer over faulty goods, and legal fees of £4,500 for purchasing the freehold of an adjoining shop. Assuming all amounts have been deducted in arriving at accounting profit, what total amount must be added back in computing her adjusted trading profit?

The add-back is £4,500. Legal costs of renewing a short lease and defending a trading claim are allowable revenue expenses, while legal fees on buying a freehold property are capital expenditure and are disallowed.

  1. A£4,500
  2. B£7,500Correct
  3. C£6,500
  4. D£9,500

Explanation

Legal fees on the renewal of a short lease (under 50 years) are allowable, as are fees for defending a trading claim. Legal fees for acquiring the freehold are capital and must be added back. So only £4,500 needs adding back. Wait: the freehold fee of £4,500 is the only disallowed item, so the add-back is £4,500, not the sum of other options.

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