For the purpose of ascertaining assessable income, all expenses wholly and exclusively incurred in the production of income shall be deducted.
The first GBP 30,000 of qualifying expenditure on plant and machinery (including fixtures and fittings) and the first GBP 50,000 of qualifying expenditure on computer equipment is fully deductible in the first year as a 'first year allowance'.
Thereafter, qualifying assets are pooled and are subject to an annual capital, or wear and tear, allowance. Allowances are available for plant and machinery (including fixtures and fittings), computer equipment, and motor vehicles at the rate of 15% (20% for companies that are obligated to pay the higher CIT rate, see the Taxes on corporate income section) and are calculated on a reducing-balance basis.
For accounting periods (or years of assessment as the case may be) ending in the period 1 July 2021 to 30 June 2023, the capital allowances deduction will be based on the higher of:
- the first GBP 60,000 of qualifying expenditure in relation to plant and machinery and the first GBP 100,000 of qualifying expenditure on computer equipment, and
- 50% of the qualifying expenditure incurred,
with the balance deductible at the rate of 25% per annum (30% for companies that are obligated to pay the higher CIT rate) on a reducing balance basis.
Capital allowances for industrial buildings are deductible at the rate of 4% per annum on a straight-line basis.
For accounting periods (or years of assessment as the case may be) ending in the period 1 July 2021 to 30 June 2023, a 1% general wear and tear allowance is available based on the cost of acquiring real property from where a business is conducted (excluding industrial buildings).
Amortisation of goodwill is not a deductible expense.
Expenditure incurred with a view to carrying on a trade is treated as incurred on the first day on which the trade is carried on for the purposes of computing the profits or gains of the trade.
Full deduction is available in respect of interest expenses, subject to anti-avoidance rules (see the Group taxation section for more information).
Only specific bad debts or specific bad debt provisions are deductible to the extent that they are respectively estimated to be bad during the said period, notwithstanding that such bad debts were payable prior to the commencement of the period. General doubtful debt provisions are not an allowable expense.
A charitable donation is not considered as having been wholly and exclusively expended for the purposes of the production of the income of the trade and is therefore not allowable as a deduction for tax purposes.
Fines and penalties
Fines and penalties, including those resulting from late payment of taxation or from failure to make the necessary tax submissions, are deemed to be a tax and are therefore not a deductible expense.
No deduction is allowed for any tax charges under the Income Tax Act.
Other significant items
Additionally, no deduction is allowed in respect of the following:
- Domestic or private expenses.
- Expenses not incurred wholly and exclusively in the generation of income.
- Any expenses of a capital nature.
- Any sum recoverable under an insurance contract or contract of indemnity.
- Property expenses not incurred for the purposes of producing income.
- Depreciation of assets (although capital allowances are available, see above).
- Employee remuneration not accompanied by a certified statement of name, address, and amount of remuneration (in respect of Gibraltar employment only).
- Certain business entertainment expenditure falling within guidelines published by the Commissioner.
- Interest paid to a non-Gibraltar resident that is more than a reasonable commercial rate.
In the case of a company that has income, some of which is chargeable to tax and some of which is not, the deductions allowed shall be apportioned on a pro-rata basis between the chargeable and non-chargeable income.
Net operating losses
A trading loss incurred in an accounting period may be offset against trading income, if any, arising in the same period or subsequent periods.
If, however, within any period of three years there is both a change in ownership and a major change in the nature and conduct of a trade, trading losses may not be offset against trading income arising in the same or subsequent periods. The Chief Minister, in his Budget Address on 2 July 2018, announced the introduction of legislation allowing the transfer of losses between group entities upon restructuring, provided that there is no change to the ultimate ownership or a change of business within a period of three years. The changes allow losses to be carried forward against a business even if the business is transferred to another company under the same ultimate ownership. A bill was published on 12 November 2020 to introduce this change and once passed it will be deemed to have come into operation on 1 July 2018.
Anti-abuse provisions restrict the transfer of losses to instances of legitimate group restructuring. The transfer of accumulated losses from one type of business to another is specifically prohibited.
Any losses not connected with or arising from the trade, business, profession, or vocation are not allowable deductions.
There is no provision for the carrying back of losses.
Payments to foreign affiliates
In the case of branches, the amount of general head office expenses incurred that is deductible is limited to 5% of its turnover.
The Income Tax Act includes anti-avoidance provisions. These provisions state that if the amount charged for goods or services by a connected person is not at arm's length, then the expenses that are allowed are subject to the lower of:
- the expense
- 5% of the gross turnover of the company, or
- 75% of the pre-expense net profit of the company.