An entrepreneur may deduct business-related expenses from their profit. The burden of proof regarding the business-related nature of the expenses rests with the entrepreneur.
Professionalism
In a recent ruling, it confirms Court of Appeal of ‘s-Hertogenbosch that the burden of proof regarding the business-related nature of the costs rests with the trader. To this end, it is sufficient for the trader to demonstrate that the costs are business-related.
The case concerns an accountancy and tax consultancy firm which the party concerned operates as a general partnership (VOF) between a man and a woman. The costs of business dinners have been recorded under selling expenses. These entries are supported by receipts. During an audit, the tax inspector adjusted this deduction. He allowed 10% of the costs of the meals to be deducted. During the appeal stage, the deductible portion of the costs was increased to 25%.
The business owner believes he can demonstrate that the deduction of the costs of the dinners is for business purposes by arguing that he regularly dines with clients and combines these dinners with the exchange of documents and business discussions.
Both the District Court and the Court of Appeal are of the view that this is not sufficient to establish that the expenses were business-related. The entrepreneur has not provided any details as to who he and his wife dined with, nor has he explained what business-related element was associated with the dinners.
Managing business affairs
Although “establishing a prima facie case” is a relatively low standard of proof, business owners would be wise to document the business-related nature of expenses such as meals in their accounts. Of course, this need not be a particularly laborious process. You can simply note the business reason for the dinner (or drinks) on the receipt.
Limited deductible expenses
The costs of food, drink and luxury goods are only partially deductible from profit. An amount of €4,500 is not deductible from profit. The business owner may request the tax authorities to deduct 80% of the actual costs of food, drink and luxury items from the profit (and to add 20% of these costs to the profit).
The business owner in the case described above invoked this scheme. He appears to have done so on the assumption that it would be more favourable to him. After all, a deduction of 80% from the costs is more than the 25% determined in the appeal proceedings. Incidentally, the proceedings took place in the 2008 tax year, when 90% of the costs of food, drink and luxury goods could still be deducted from the profit, rather than 80%.
However, determining whether the expenses are business-related must be done before applying the rules on limited deductible expenses. The deduction limit must be applied to the ultimately deductible portion of the costs of the dinners (25% of the total costs).