STOCK Corporate tax / Tax
For individual-owned businesses, it's always the 'head' over 'heart' equation when it comes to tax deductions. Image Credit: Shutterstock

In case you didn’t know, a famous singer-musician – and the world’s fastest keyboard player - got his fingers insured for over a million dollar. Two of the most famous soccer players have their legs insured for astronomical values.

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The question to you is whether such expenses would be considered as incurred ‘wholly and exclusively’ for their profession or not?

Let us now move a step closer to UAE corporate tax. Individuals conducting business in the UAE – with annual turnover of at least Dh1 million– would be required to undertake corporate tax compliance. Such business could be conducted by an individual directly, as a sole establishment, or as a partner in an unincorporated partnerships. The most prominent examples would be lawyers, doctors, artists and consultants.

If such individuals were to incur certain expenses, say a heart surgery, would medical expenses be treated as incurred ‘wholly and exclusively’ for the individual’s business? Similarly, many companies incur expenses for the treatment of their employees. Would such expenses be treated as ‘wholly and exclusively’ for the company’s business?

Maintenance of machinery

The Federal Tax Authority’s corporate tax guidelines provide an example of an individual operating a business through a sole establishment and incurring expenses for dental work. As per the guide, it is likely that such expenditure will not have been incurred for the purpose of the business and would not be deductible for corporate tax purposes.

It also states that purchasing a long-term asset like machinery would be a capital expense, but paying for routine maintenance to keep the machinery running would be a revenue expense. The example immediately reminded me of a famous ongoing tax dispute before the Supreme Court of India.

Heart surgery

A lawyer claimed an expense deduction for a coronary surgery from his taxable business profits. The main contention is that his heart should be treated as a plant and machinery, which enables him to carry out his profession. That the surgery was similar to carrying out ‘repair and maintenance’ of a plant.

Alternatively, the heart surgery ensured that his business continued without any hindrance and should hence be allowed as a typical business expenditure incurred wholly and exclusively for his business.

The decision of UK’s Court of Appeal in 1887 established the principle that a ‘plant’ includes whatever apparatus is used for carrying on the business. It includes all goods and chattels, fixed or movable, live or dead, kept for permanent employment in the business. Accordingly, a live animal – say, a workhorse used for carrying goods - was held to be akin to plant and machinery.

Interestingly, several courts have observed that a singer/vocalist could possibly claim a tax deduction for expenses incurred for repairing his/her vocal cords.

So, does a lawyer’s heart become a plant for his/her business? The answer could perhaps lie in whether the lawyer uses the brain or the heart to practice the legal profession. Amusing at it may sound, the tax tribunals decided a lawyer uses his brain and not his heart for legal profession.

The famous quote by Elbert Hubbard – ‘Do your work with your whole heart?’ – may perhaps not come to the rescue to claim a tax deduction.

Would the tax laws require that such body organs be recorded as assets in the account books to allow medical expenses as deductible for tax purposes? Would companies be foregoing the tax benefits on medical expenses incurred on the employees?

The corporate tax optimisation and compliance requires answers to many such stimulating questions. The tax jurisprudence in the UAE will evolve and it is important for business owners to ensure in the interim they ask the right questions. And have their transactions thoroughly examined.

The writer is Managing Director of AskPankaj Tax Advisors.

- Pankaj S. Jain