Questions and Answers - December 2007
Providing A Christmas Lunch to Employees
Q: In addition to our annual staff Christmas party, I would like to treat my employees to a Christmas lunch as a thank you for their hard work and commitment. Can I claim the costs for the lunch as a business expense and what are the implications on the employee?
A: The cost of providing the Christmas lunch will be a deductible expense for your business. However you will need to consider the benefit in kind rules for the employees.
If the employer provides employees with one annual function, no charge to tax arises if the cost of the event per head does not exceed £150 (prior to until 5 April 2003 the figure was £75 per head). It is important that you must provide this event to all employees, and cannot just provide it to a select few, as this will not be covered by the exemption.
As you will be providing two functions, then you must aggregate the cost for each employee, and if this does not exceed the limit no benefit in kind will be assessed. The figure of £150 is not an allowance, and if the employee chooses not to attend the meal or party, they cannot receive the allowance in cash tax free.
You should be aware that if the combined costs, including VAT, exceed £150 per head, then a benefit in kind is assessed on full cost of the event which exceeds the limit, as it is not just the excess over the exemption which is chargeable.
Claiming the Cost of Tools, Equipment & Clothing
Q: I am about to submit my tax return, and have overheard on site that I can claim a deduction for some tools and clothes that I bought during the year. Is this true?
A: You haven’t said if you are self employed or employed. If you are running your own business, then you are able to claiming a deduction against your business profits for all tools which you have renewed or special clothing you have purchased specifically for your business in the year. Any larger tools and equipment will qualify for capital allowances.
If you are employed, the rules are slightly similar, but you must be able to justify the tools and equipment are necessary for undertaking your employment. HMRC accept that dealing with individual deductions for employees would be cumbersome and time consuming. Therefore they publish a list of industries where the employees can claim a flat rate deduction against their employment income and have agreed these amounts with the trade unions. All you need to do is check the list on the HMRC website here www.hmrc.gov.uk/manuals/eimanual/EIM32712.htm and then make the claim on the second page of your self assessment employment pages.
If your cost actually exceed the flat rate amounts published, you are still entitled to make a claim for the actual expense you have incurred, but a deduction will only be permitted if you can provide evidence to demonstrate the amount was actually incurred, so you must have receipts. If you chose to do this in one year, then you are not prevented from deducting the flat rate expense in other years when you do not have evidence.
Interest and Surcharges?
Q: I filed my tax return before Christmas but due to cashflow problems I do not think I will be able to pay the tax I owe by the deadline of 31st January. Will I still receive a late filing penalty of £100?
A: You will not receive the £100 penalty as you have filed your tax return before the 31 January deadline, but as you haven’t paid your tax liability for the 2006/07 tax year, the HMRC will begin to charge you interest on a daily basis starting from 00.00am on 1st February on the tax unpaid. Currently interest is being charged by the HMRC on late payment of tax at a rate of 6.5%.
You must also try to ensure that you pay the tax you owe by 28 February, as any amounts relating to the 2006/07 tax liability that are still unpaid at this date will receive an initial 5% surcharge. Also, an additional surcharge of 5% will be levied on any tax outstanding if you still have not cleared your 2006/07 tax liability more than 6 months following the filing date, which is the 31 July 2008.
Ltd Company Gift Aid
Q: I am a director of a small limited company, and want to make a donation to a local childrens hospice this Christmas. Can you advise on the best way to do this?
A: Assuming the children’s hospice is a registered charity, your company will get corporation tax relief on the payment, which is currently set at 20% to April 2008. The company simply makes the payment through to the charity, and deducts the amount as a `charge' when working out its profits for corporation tax purposes.
Unlike the gift aid scheme for individuals, your company will make the full payment to the charity. You do not need to deduct any tax from the payment and the charity does not claim back any tax on the gift.
You no longer have to provide a Gift Aid certificate to the charity or provide a new form of declaration. However it is recommended that you keep some form of evidence of all the payments you have made to charities in the year in the same way as for other items in your Self Assessment corporation tax return.
If your company does not have a corporation tax liability in an accounting period, there are special rules regarding how any loss created by the donation can be used. Your local TaxAssist Accountant can provide further details.
Providing Christmas Hampers To Staff
Q: Some of my employees have asked that, rather than attend the annual Christmas dinner if I would give them the equivalent via a food and wine hamper. I am happy to do this but can you tell me whether or not they will have to pay tax on this?
A: The provision of events such as Christmas parties, open to all staff, will not lead to taxation unless they exceed £150 per head for the tax year. However if you wish to give items such as hampers, then this will have to be taxed through the payroll or the P11D form. A way round this would be to apply by letter (there is not a form) to your PAYE inspector and ask for a PAYE Settlement Agreement (PSA) to be set up, detailing what items would be covered.
You cannot include large regular items such as sole-use company cars, car fuel, salary, bonuses, round sum expenses etc. The agreement has to be renewed each year. As the employer you would then be liable to pay the tax and National Insurance over.
Disclosing Rental Income
Q: I purchased a buy to let property in June last year and began to let this out almost immediately. I don’t receive a tax return to complete as I am employed. Should I let my tax office know I am in receipt of another source of income?
A: If a taxpayer receives any taxable income in a tax year of which the Revenue is unaware, there is a requirement to notify the tax office by 5th October. As you have made a small profit form your rental income activities then you should have notified HMRC. This gives them enough time establish if a tax return is required and to issue you with one to fill in.
For example, if any income was received between 6 April 2006 and 5 April 2007, then the individual must inform the Revenue by 5 October 2007. You will then need to disclose this on a tax return by 31st January 2008.
However, under the new guidelines issued for Self Assessment for the 2004/05 tax year onwards, HM Revenue & Customs are trying to reduce the burden of Self Assessment on taxpayers who have straightforward affairs and have identified some areas where a tax return will still not required. If the amount was £15,000 or less, then it is likely that the HMRC will issue a 'short' tax return to you rather than a full form.
Tax Relief on Losses
Q: I started my own business last year, and due to some significant initial start up costs I made a substantial loss in my first period of trading? Can I claim relief for these losses, and get some tax back? Prior to starting my new venture I was employed over the last 4 years paying tax at 40%.
A: You have a number options with regard to claiming relief for your losses. You can offset the loss against the income you earned in previous tax years. The options you have are to:
- carry the loss back against other income you received in the tax year arising 3 years previous or
- set it against other income in the tax year of the loss , or
- set it against other income in the previous tax year.
You will reduce your total taxable income by the amount of the loss and as you are a higher rate tax payer in all of these years you will effectively receive up to a 40% tax refund for the losses you have made. If circumstances were different, and neither of these is beneficial, you can instead chose to carry the loss forward and set it against future profits from your business.
One other useful point to note is that you are also entitled, under any of the options above, to obtain National Insurance Class 4 relief for the losses. This can provide you up to a further 8% relief through a reduction in your National Insurance liability on future profits from your business.
In all cases it is best to seek professional advice from an accountant on this subject, as they can establish which option is most tax efficient, and provides you with the greatest tax refund.
VAT implications of Staff Teambuilding
Q: I have recently agreed to take a number of new employees on a team building exercise in January. Can I reclaim the VAT incurred on the costs for this event?
A: Where an employer provides entertainment such as staff parties, team building exercises, staff outings and similar events for the benefit of employees to reward them for good work or to maintain and improve staff morale, they are not blocked from input tax recovery under the business entertainment rules, as it provides the event wholly for business purposes.
However, there are 2 exceptions to the general rule. These are where:
The entertainment is provided only for directors or partners of a business, the VAT incurred cannot be recovered as the goods or services purchased are not used for a business purpose.
However, where directors and partners of the business attend staff parties together with other employees, the vat is not blocked from recovery.
Employees acting as hosts to non-employees incur costs that are for the sole purpose of entertaining a non-employee, the tax is blocked under the business entertainment rules.
