Christmas is a time of goodwill and generosity, manifesting itself in some workplaces through the tradition of employee gift-giving and the office Christmas do. But without wishing to sounding like Scrooge, these activities are still subject to tax terms just like many other business matters. So, as a small business owner, how can you navigate the holidays while staying on the 'nice' list at HMRC?
Happily, there is a tax exemption for employee entertaining. But before you deck the halls with abandon, take note: HMRC stipulates that this relief applies only to one or more annual parties available to all employees, where the total cost of said parties does not exceed £150 per head (for all attendees – including clients and guests of employees). It's worth sticking closely to the Christmas party budget, because going over this amount by even a fiver makes the whole cost of the event taxable as a benefit in kind.
If you've exceeded £150 per head, the amount exceeded must be reported as a benefit on the employee's P11D. Conversely, you as the employer may pay the tax as a PAYE settlement agreement (PSA) and pay income tax and National Insurance contributions on behalf of your employees. Neither is welcome if you intended to stay within the exemption, so when working out your event budget, take everything into account - including taxis home - to avoid getting burned by unexpected taxes.
Christmas cards to clients and prospects are considered an office expense and are deductible, provided the cards carry a clear advertisement for your company. So be sure to take advantage of this cheerful way to remind clients and customers of your business offers, and sail into the New Year on a tide of goodwill.
Christmas wouldn't be complete without a nice bottle of plonk from the client with whom you've had an exceptionally good year, or the box of truffles from the prospective client looking forward to a productive new relationship. It's also common for employees to receive Christmas or birthday gifts from business contacts. Happily, any small client gift, promotional or otherwise, if under £50 in value is tax-exempt for you or your employees. Anything over will need to be reported on employees' P11D and tax paid.
Christmas gifts from you to clients are classed as 'entertaining' and aren't tax deductible for corporation tax purposes.
The practice around giving bonuses varies from business to business, and often from year to year within the same company - depending on economy and performance. While it's up to you to decide how best to hand out this tricky treat, as far as HMRC goes the procedure remains the same. A Christmas gift in the form of a monetary bonus is taxable like all other earnings. Just put it through as per your usual PAYE system. The voucher, another popular option, is handled a similar way - an employee must pay tax on its full value.
Small tokens such as gift baskets and bottles of wine on the other hand are unlikely to be taxable within a reasonable cost bracket. If the value of a gift is more than £50, you had best report it as a benefit on the employee's P11D or pay the tax as a PAYE settlement agreement (PSA) as above.
Follow the above and you should keep on the sweet side of both the HMRC and your employees. Finally, always check with your adviser or HMRC for more specific advice as rules can change.
Copyright © 2014 Riz Wasti from Clapham-based 2E Accountants.
A useful guide to R&D tax credits from Innovation Plus.
The Chancellor of the Exchequer, George Osborne, delivered his final Autumn Statement this morning before next year’s general election.
Many businesses were hoping for some pre-Christmas give-aways and the Chancellor undoubtedly had one eye on the general election. However, some experts were warning that there was little room for manoeuvre and the consensus was that further tough choices needed to be made.
So, faced with this dilemma, what did the Chancellor announce?
Responding to the Autumn Statement, John Allan, National Chairman of the Federation of Small Businesses (FSB), said, “The Chancellor has listened to the needs of business, despite tight public finances. The focus must be on reducing the deficit not just for this Government but whoever holds the keys to Number 11 next year.
“The FSB is delighted to see the double small business rate relief remain for another year and a full review of the outdated business rates system, something we’ve long argued for.”
Commenting on the exemption from NI for young apprentices, Patrick Reeve, Managing Partner of Albion Ventures, said, “Apprenticeships play a vital role in growing our economy and getting young people into the jobs market. But, our research shows that 56% of manufacturing firms currently have no plans to launch an apprentice scheme. Abolishing National Insurance for those aged under 25 is a strong incentive and will soften employer attitudes. We’ll be watching with a keen interest how businesses respond.”
With UK economic growth predicted to slow next year following fresh concerns about the global economy, accountants, business-support and trade organisations have been airing their requests and predictions ahead of Chancellor George Osborne’s Autumn Statement, which he will deliver to Parliament on Wednesday 3 December.
As reported by Georgia Graham in The Telegraph in early October, business secretary Vince Cable indicated that Osborne will announce something "positive" regarding business rate relief for small businesses. “Business rates are a key election issue and the Government is under growing pressure to reform the controversial tax,” she wrote.
As later also reported in The Telegraph by Roland Gribben: “The Federation of Small Businesses wants an ‘aspirational’ Autumn Statement that encourages businesses to grow and create employment. John Allen, FSB chairman, [wants] measures that will help boost the digital and regional economies. He strongly supports the Government’s regional policy, but wants the Chancellor to simplify the UK’s complex tax system.”
The Forum for Private Business (FPB) has produced a smart-looking Autumn Statement infographic. It says: “The Government still has some tough choices to make when it comes to deficit reduction, but small businesses have a vital part to play in ensuring a sustainable recovery. That’s why we’d like to see George Osborne mitigate the cost impacts for the small businesses over the next year.”
It called for: “Small Business Rate Relief to be extended to [the end of this] parliament”. It added: “In many areas, business rates are now substantially higher than rental costs”, which is why the FPB is calling for an independent study into business rates. It also wants a freeze on fuel duty, a strengthening of the Prompt Payment Code and a review into the “blockages that prevent more peer-to-peer finance” for small businesses.
The ICAEW (Institute of Chartered Accountants in England and Wales) has made three suggestions. Firstly, it wants to see a “finance leader at the top of Whitehall”. Blogging on the ICAEW website, CEO Michael Izza wrote: “We were encouraged by the appointment of a new director general of public spending. However, we want to see this person cover both income and expenditure – ie have proper control over the public finances”.
The organisation also wants the British Business Bank to “invest in better finance advice for SMEs” and HMRC to “use existing powers properly, not “direct recovery of debts from bank accounts”. Izza called for Osborne to “avoid any short-term political land-grabs, and instead focus on practical measures that will help secure our economic recovery”.
Alex Henderson, partner in PwC’s tax practice, expects “the Chancellor to deliver messages around attracting enterprise to the UK and Britain being open for business. He’s likely to build on previous corporate tax reforms. In the past, he’s announced a reduction in the rate of corporation tax; will he go further with that? Or [might he] look at expanding corporate tax reliefs?”
He adds: “We’ve already heard about owner employees delivering tax advantage shares in return for giving up employment rights. We’ll hear more about that I’m sure. But he might announce some other measures; growth-related pay, for example, delivering tax-free pay linked to growth in your company.”
According to chartered accountants Grant Thornton: “In order to maintain and accelerate economic growth in the UK, the government should use the Autumn Statement to back the mid-sized businesses and high growth firms (or 'scale ups'), which can make the biggest contribution to wealth and jobs growth”.
If you are the owner of a business that’s not publicly listed, you’ll want to draw money from your company for your own use. If your business is registered as a limited company, it’s a separate entity from you, and there are a number of ways you can draw money from it. It all depends on the relationship you form with your business.
According to Riz Wasti from 2E Accountants you will typically have three main relationships with your business: as a lender, an employee, and an owner/shareholder. Here he describes the five ways you can draw money from your business, based on these relationships:
If you have lent money to the business for any reason then this is considered a loan like any other loan, and as such it’s payable back to you.
Advantages: the cash you will receive personally as a loan repayment is not subject to personal tax.
As you work in your business you can earn an employee’s salary. Keeping the salary low can help to keep the tax costs to you and your business at a minimum.
For example you could pay yourself up to the limit of the employee National Insurance (NI) threshold (£153 per week for 2014-15 tax year) or up to the director’s annual personal basic allowance (£10,000 per year for 2014-15 tax year].
Advantages: salary is a tax deductible cost to a business thereby reducing your corporation tax. Also, under the threshold you will not incur personal tax.
You may incur expenses in your business which you pay personally. As long as the expenses were exclusively for business, you can claim them back from the business.
In addition HM Revenue & Customs (HMRC) allows for using some personal assets for business; eg if travelling in your own car for business purposes, you can claim 45p per mile without incurring income tax. There are also allowances for the use of your home if working from home.
Advantages: as long as expenses are allowable there will be no personal tax liability and you will get a reduction in corporation tax.
A company will pay 20% corporation tax on profits. The profit-after-tax is then available to distribute to its shareholders. This is called dividends.
If you pay yourself a dividend, up to the basic rate income level (the basic rate at 20% is £31,865 per year for 2014-15 tax year), you will not have to pay additional personal taxes.
Once your gross personal income goes over the basic income threshold, the tax rates for dividend income also go up.
Advantages: dividends give businesses the flexibility of keeping salary costs low and paying shareholders after earning actual profits, allowing owners to earn in the most tax-efficient way.
Capital gains occur when, as a shareholder, you sell your shares to someone at higher than cost value.
The capital gains tax rate starts from 18% (gains to basic rate limit 18%, gains above basic rate 28% for the tax year 2014-15). However, there is an annual exemption available for the first £11,000 (2014-15 individual allowance). Also, if you qualify for Entrepreneur’s Relief you will only have to pay 10% capital gains tax.
Advantages: tax liability is lower than income tax.
As a small business owner, you have multiple options to get returns from your own managed business. HMRC rules can be complex and the rates and allowances are subject to change each year. An accountant or a financial advisor can help you decide between options, to ensure that your decisions reflect the choice most economical and advantageous to your business.
Copyright © 2014 Riz Wasti of 2E Accountants.
Faith in the traditional banking system has waned and the doors are opening to new entrants. Anyone can be a banker now. In fact, anyone can be a central banker and create their own money or, rather, mine it, like gold. This is crypto-currency or secret currency, of which Bitcoin is the best-known example.
Reminiscent of the ’49 California gold rush, the giants of Silicon Valley are piling in. What’s not to like? Low transaction fees, no FX, no banker-of-last-resort, no deposit insurance scheme, no Financial Ombudsman.
In fact, it’s not money; it’s a commodity. The US Department of Justice has declared it to be ‘goods’. Paying with Bitcoin is not paying with money. It is barter: offering goods for goods.
Should VAT be added to a Bitcoin payment you are making if you are VAT-registered? Since Bitcoin is secret, do you even know who you are trading with, what VAT should be added or what you put in your EU Sales List?
Should payments made with Bitcoin be added to ‘Cost of Goods Sold’ or payments received added to ‘Sales’? What is the treatment if the value of Bitcoin owned rises or falls? Are such profits taxable and any losses tax-deductible?
These are some important questions, but ones that can get lost in the rush to innovation – small businesses really do not want to get caught out. Similarly, why can Bitcoin be termed an ‘investment’ when the exchanges on which it is traded are unregulated and their location, staffing, ownership and accounts may be invisible? Who is the market-maker in the goods and how can you be sure you can get your value out in real money when you want it? Bitcoin may appear attractive when deposit rates are 0% but the business propositions, security and safety nets are very different.
With crypto-currencies it’s as Tina Turner once said in the 1985 film Mad Max 3: Beyond Thunderdome: “I know you won't break the rules, because there aren't any”.
Copyright © 2014 Robert Lyddon. Robert Lyddon is general secretary of international banking network IBOS.