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What are the tax rules regarding staff bonuses and gifts at Christmas?

December 10, 2014 by Tax Donut contributor

Tax-efficient ways to reward your staff at Christmas{{}}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?

1 The office party

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.

2 Christmas cards and gifts to/from third parties

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.

3 The Christmas bonus

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.

Further reading

Autumn Statement 2014 - round up of the main announcements

December 03, 2014 by Fiona Prior

The Chancellor's Autumn Statement - summary and comments{{}}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?

  • GDP: forecast to grow by 3% in 2014, 2.4% in 2015, 2.2% in 2016, 2.4 in 2017 and 2.3% in 2018 and 2019.
  • Business rates: small business rates relief will be doubled for a further year, increases will be capped at 2% and transitional rate relief will be extended for smaller properties.
  • Business rates: there will be a full review of the current business rates system to help local shops compete with online rivals.
  • Business rates: new, devolved powers for Wales to set business rates.
  • Tax relief: Tax-free personal allowance to increase to £10,600 next April. Increase in higher rate threshold £42,385 next year from April.
  • National Insurance: extension of Employment allowance to include carers.
  • National Insurance: will be abolished for all apprentices under 25 from April 2016.
  • Corporation tax: plans for it to be devolved in Northern Ireland if the Northern Ireland Executive can show it can manage the financial implications.
  • R&D tax credit: increased to 230% for SMEs and 11% for large firms.
  • New Children’s Television Tax Credit and extension of the theatre tax break to cover orchestras.
  • Entrepreneurs’ relief: gains that are eligible for entrepreneurs’ relief but which are deferred into investments under Enterprise Investment Scheme or Social Investment Tax Relief will benefit from Entrepreneurs’ Relief when the gain is realised.
  • Social Investment Tax Relief: annual investment limit increased to £5 million.
  • A new consultation on relief for indirect investment in social enterprises.
  • New Diverted Profit tax: 25% tax to be paid on profits generated in the UK by multinationals to avoid the practice of diverting profits.
  • VAT: will be refunded to hospice charities, search and rescue and air ambulance services.
  • Stamp duty: from 4 December 2014, the way Stamp duty is calculated will be reformed. It will only be paid on the part of the property price within each tax band. 0% for properties under £125,000; 2% on amounts between £125,000 and £250,000; 5% on amounts between £250,001 and £925,000; 10% on amounts between  £925,000 and £1.5 million; 12% on amounts over £1.5 million.
  • Air passenger duty: will be abolished for children aged under 12 from 1 May 2015 and for all children under 16 from 1 March 2016.
  • Fuel duty: frozen.
  • Export: £45 million export support package for new exporters and exporters to growing economies in Asia, South America and Africa.
  • Funding for Lending Scheme: a one-year extension to the scheme until 29 January 2016 focussing on smaller firms.
  • First World War debt: will be repaid in full.
  • Pensions: the 55% tax on unused pensions at death is to be abolished meaning they can be passed on tax free.
  • ISA: savings limit to be increased from next April to £15,240.
  • ISAs: from 3 December, it will be possible to inherit an ISA tax free.
  • Inheritance tax: a new exemption for Aid Workers who die in service during humanitarian emergencies.
  • National Infrastructure Plan: a government programme of investment in roads to include a tunnel under Stonehenge, flood defences and new homes.
  • Housing: thousands of new homes are to be built in East London and Brent Cross and a new affordable homes programme will deliver 275,000 new homes between 2015 and 2020. There will also be a new garden city at Bicester.
  • New government-backed loans for postgraduate students
  • Banks: 50% limit on profits that can be offset by losses being carried forward.
  • Non-domiciled residents: increased annual charge of £60,000 for those that have been resident for 12 of the last 14 years and £90,000 for those that have been resident for 17 of the last 20 years.

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.”

For more on this topic, see:

What can small firms expect from George Osborne’s Autumn Statement?

December 01, 2014 by Mark Williams

What can small firms expect from George Osborne’s Autumn Statement?{{}}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.”

Business rate relief

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”.

Growth-related pay?

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”.

Further reading

Five ways of drawing monies from owner-managed limited companies

November 24, 2014 by Tax Donut contributor

5 ways of drawing monies from owner-managed limited companies{{}}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:

As a lender to your business

  • Director’s loan

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 an employee of your business

  • Salary

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.

  • Reimbursable expenses  

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.

As a shareowner in your business

  • Dividends

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

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.

Conclusion:

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.

Further reading

What are the tax implications of Bitcoin for businesses?

November 11, 2014 by Tax Donut contributor

What are the tax implications of Bitcoin for businesses?{{}}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.

But what are the implications?

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.

Further reading

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