Christmas Tax Tips

Christmas is a time for… parties
You can lay on a party or social function for your employees tax-free provided that the cost does not exceed £150 per head, per year. The event must be held for the main purpose of entertaining staff - the cost will become a taxable benefit if it is designed to entertain only directors or management, or if some members of staff are excluded.

In order to work out the cost per head you need to add together the VAT inclusive cost of the event together with any costs of transport and accommodation. You then divide this by the number of people attending.

The £150 is not an allowance, so if the cost is £151, the whole benefit is treated as a taxable benefit for your higher paid employees. For lower paid employees (those earning less than £8,500 per year) this benefit is tax free.

The cost to you the employer of laying on the event is deductible for tax in your business’ accounts. However, if you are using the event for entertaining customers or clients too, then you must remember to disallow a proportion of the cost for tax. You can claim back input VAT but only a proportion if the event is also to entertain customers.


Christmas is a time for…giving

You can give an employee a gift at Christmas, or on a special occasion such as marriage or a birthday and there will be no taxable employment benefit providing the gift is trivial.

The sort of gifts that are treated as “trivial” by HM Revenue & Customs (HMRC) are:
• A box of chocolates
• A bottle of ordinary wine
• A turkey
• Flowers
The cost is tax deductible in your business accounts too.

If a gift is not trivial there will generally be a tax charge on the employee. This will need to be reported on form P11D at the end of the year. You can alternatively settle up with HMRC by using a PAYE settlement agreement.

If you make a gift to a customer the cost may be deductible in your accounts providing it is not alcohol and that it advertises your business. If you make gifts to customers consider the tax treatment very carefully. If you are VAT registered you can reclaim VAT on the cost of the gift. If you make a gift in excess of £50 or makes a series of gifts to one person exceeding £50 you should account for output VAT on the value of the gifts.

The European court recently ruled that when a business makes gifts of its own products as samples it does not need to account for VAT.

VAT: the rate change

The standard rate of VAT increases from 17.5% to 20% on 4 January 2011. This means that businesses will need to adjust their bookkeeping methods as well as their software and it will make reconciliation of VAT more complicated in the quarter in which the change takes place.

The VAT fraction changes to 1/6.
• So, if a supplier charges you a VAT inclusive price of £120 multiply by 1/6 to calculate the VAT of £20, or by 4/5 to calculate the net price of £100.

There are special rules for sales that span the change in rate:

• If you sell goods or services before 4 January 2011 and do not raise a VAT invoice until after that date: you can choose to account for VAT at 17.5% (all of your non-VAT registered customers will appreciate this).

• If you started work for a customer before 4 January 2011 but did not finish it until afterwards you may account for the work done up to 4 January 2011 at 17.5% and the remainder at 20%. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.

• If you provide a continuous supply of services, such as leasing of equipment you account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. So, you must charge 20% on invoices you issue and payments you receive on or after 4 January 2011. You may, if you wish, charge 17.5% on the services you've provided in the period up to 4 January 2011 and 20% on the remainder. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.

• If you issued a VAT invoice or received prepayment before 4 January 2011 for goods or services which you provided on or after that date VAT will normally be due at 17.5%.

Problem areas
If you use bookkeeping software you will need to ensure that you have set up the correct VAT codes so that you can post transactions against the right rate. This can be a problem if you are Cash Accounting; you will need to be able to identify payments received after 4 January 2011 that relate to supplies made before that date.

The Flat Rate Scheme percentages have also been re-calculated to reflect a standard rate of VAT of 20%.

VAT and tax penalties: HMRC may change tax penalties on any taxpayer who makes an error in a return of document. It will operate a “light touch” on taxpayers who take reasonable care to account for VAT correctly as a result of the VAT change.
“Reasonable care” means “asking if you think there is a problem”. If you have any queries about VAT, the change in rate, or any other taxing matter, please give us a call on 0800 63 444 76.


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