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VAT on gifts, benefits and entertaining

Trivial Benefits

Many business owners are now making use of the trivial benefits exemption which was introduced a number of years back. Trivial benefits are an allowable business cost and you don’t have to pay tax or National Insurance on a benefit for an employee/director if all of the following apply:

  • it cost you £50 or less to provide (per occurrence)
  • it isn’t cash or a cash voucher
  • it isn’t a reward for their work or performance
  • it isn’t in the terms of their contract

However, directors of a company run by 5 or fewer shareholders can’t receive trivial benefits worth more than £300 per person in a tax year.

Examples of trivial benefits may include a birthday or Christmas gift, a bunch of flowers for a bereavement, or a staff meal out etc. Trivial benefits are in addition to the annual staff party exemption of £150 per head.

But what is the VAT position?

Gifts of goods

Input VAT incurred on the purchase of business gifts can be recovered, but you may also have to account for the output VAT on the cost i.e. effectively pay back the VAT to HMRC, unless the total cost of all the gifts given to the same person does not exceed £50, excluding VAT, in any 12-month period.

In simple terms, to avoid this problem, this means that you should not reclaim input VAT on gifts, where the total of all gifts to the same person in a 12-month period will exceed £50, excluding VAT. This rule applies to gifts to all persons, including directors, employees, customers and suppliers etc.

Staff parties and outings

Where an employer provides entertainment for the benefit of employees, for example to maintain staff morale, it does so wholly for business purposes. Therefore, the input VAT paid on costs such as staff parties, team building exercises, staff outings and similar events is recoverable.

However, there are two exceptions to the general rule. These are where:

  • entertainment is provided ONLY to directors, partners or sole proprietors of the business, or
  • employees act as hosts to non-employees.

Therefore, unless other employees, other than the owners or directors of the business, attend the event, you cannot reclaim the input VAT incurred. But if other employees attend, all the input VAT is recoverable.

Strictly speaking therefore, if you are a one-person business or a company consisting only of directors, you should not reclaim the input VAT on staff entertaining.

Entertaining others

Entertaining non-employees is not a tax deductible business expense, although it is perfectly acceptable for the business to pay for the cost; it just won’t save you any tax. Therefore, neither can you reclaim input VAT on non-staff entertaining.

If there is a mixture of staff and non-staff at an event, you can apportion the input VAT and reclaim the appropriate proportion. However, if the attendance of non-staff is for the sole purpose of entertaining a non-employee, the input VAT is not recoverable at all.

Further information

More information about theses topics can be found here:

Business promotions (VAT Notice 700/7)

Business entertainment (VAT Notice 700/65)

Annual Staff Parties

Entertaining employees (including directors) is an allowable trading expense, provided it is not excessive and is wholly and exclusively for the purposes of your trade, and not just incidental to the entertaining of customers. However, to ensure that the employees are not taxed on the benefit, the event must:

  • be an annual occurrence eg Christmas party or summer barbeque,
  • not cost more than £150 per head (including VAT), and
  • be open to all employees (not just directors), unless the company consists only of directors.

However, confusion can occur over the rules so things to watch out for include:

  • If the cost per head is over £150 then the whole amount is a taxable benefit on the employees, not just the excess.
  • If you have more than one event per year, the exempt amount is reduced proportionately.
  • The exempt amount is not a flat rate that you can claim. You must actually incur an expense and keep receipts, so if the event costs £50 per head, that’s all you can claim.
  • The exempt amount includes all expenses incurred (not just food and drink) eg room hire, travel etc.

Directors are eligible employees, so a company consisting solely of directors can have a tax free and tax deductible annual bash. However, self employed people cannot. Subcontractors are not employees and so are not eligible for the exemption. Also this would be business entertaining and would not be an allowable trading expense either.

If there are employees’ partners or friends at the party, then these individuals count as part of the number of people present when you’re working out the amount.

If your business is VAT registered, you should also consider the VAT implications. More information about when VAT is recoverable can be found here

Autumn Statement 2023

Today the Chancellor, delivered his Autumn Statement, which as a result of the drop in inflation, tax cuts were the main topic of discussion. Below is a summary of some of the main points of interest, but the full statement can be found here.

National Insurance Cuts

Employee National Insurance is to be cut by 2% to 10% with effect from 6 January 2024.

Class 4 National Insurance for self employed will be cut by 1% to 8% from April 2024.

And Class 2 National Insurance, also paid by self employed, is to be abolished entirely, although those who need to make voluntary contributions towards their state pension record, will still be able to do so.

National Living Wage

From April 2024, the National Living Wage will rise from £10.42 per hour to £11.44 per hour. This will now apply to anyone over the age of 21.

Business Rates

The small business multiple is to be frozen for another year, and the 75% discount for retail, hospitality and leisure businesses is to be extended too.

Capital Allowances

Full expensing for capital expenditure will be made permanent, meaning companies will be able to get tax relief on the full cost of new plant and machinery in the year of purchase, in addition to the Annual Investment Allowance threshold.

National Minimum Wage Pitfalls

We have covered this topic before, but following some further recent high profile cases brought against WHSmith, M&S and Argos, all found to be underpaying staff because they hadn’t considered the national minimum wage (NMW) legislation carefully enough, it’s worth covering this again.

WHSmith were found to have underpaid staff about £1 million because they had a uniform policy which required staff to buy their own uniforms, but this resulted in their salaries falling below the NMW.

A similar case a few years back involved Wagamama. The restaurant chain was forced to reimburse employees after misunderstanding how wage laws apply to staff uniforms. Front-of-house staff were required to wear black jeans or a black skirt with their branded Wagamama top. HMRC considered this akin to asking the staff to buy a uniform. Wagamama updated its uniform policy and now pays a uniform supplement to cover the black jeans.

The food store chain Iceland was also in trouble in recent years because HMRC claimed that staff should be compensated for their work footwear since staff guidance advocates “sensible shoes” should be worn.

There is also the issue of time taken to put on and take off safety clothing or a uniform. NMW laws take that time into account. If a worker’s hours in a factory are from 9am to 5pm but they have to arrive 15 minutes earlier to dress, and then another 15 minutes after work, that’s part of their duties.

HMRC have a useful checklist on their website of the most common causes of NMW underpayments, which employers can refer to here.

Check Your National Insurance Record

The government is giving taxpayers more time to fill gaps in their national insurance contribution (NIC) record, and so maximise the amount of state pension they will be eligible to receive. You now have until 5 April 2025 to buy back any missing national insurance years from 2006 to 2016.

Normally you can only buy back up to six years, but when the new state pension was introduced, transitional arrangements were put in place to allow people to go back further.

Many people don’t realise that they have years for which they didn’t pay NIC for the full 52 weeks, and so have a gap in their NIC record. If that’s the case for you, then you won’t be entitled to the full state pension.

Individuals who reach state pension age on or after 6 April 2016 need 35 full years of NIC in order to receive the maximum state retirement pension.

How to check your record

You can check your NIC record in your online personal tax account. This will also provide an estimate of the state retirement pension you should receive.

If you have any gaps, first check if HMRC’s records are correct, then consider if it will be worth making Class 3 voluntary NICs to make good missing years.

 

Spring Budget 2023

The Chancellor Jeremy Hunt has unveiled his ‘Back to Work’ March Budget. Below we summarise some of the key points.

Taxes and thresholds
All of the changes to taxation will go ahead as previously announced in the autumn statement.

Investment Allowance 
The Annual Investment Allowance to be permanently increased to £1million. Additionally, there will be a new policy for capital expenditure introduced, to enable ‘full expensing’ in the year of purchase.

Pension Allowances
The £1million lifetime allowance is to be abolished, and the annual tax-free allowance is to be increased from £40,000 to £60,000.

Research and Development
Small and medium-sized businesses will be able to claim a credit of £27 for every £100 spent, if they spend 40% or more of their total expenditure on Research and Development.

Inflation
The OBR has said that the UK will not enter recession this year. Inflation is set to fall to 2.9% by the end of the year.

Childcare
The thirty hours of free childcare for working parents will be expanded to cover all children under five by September 2025.

Chancellor’s Autumn Statement

Here we are again, just 8 weeks after the last budget statement! Hopefully this one will make it through to implementation, but this time we are looking at tax hikes instead of tax cuts. Below are some of the important highlights in relation to tax, but the full statement can be found here.

Personal taxes

The point at which the 45% rate of income tax applies will be reduced from £150,000 to £125,140.

The allowances and bands for income tax and national insurance will be frozen until April 2028, which effectively means more people will pay more tax, and at higher rates, as a result of increasing wages and inflation.

The tax free dividend allowance will be reduced from £2,000 to £1,000 next year, and then to £500 from April 2024.

The Capital Gains Tax annual exemption amount is to reduce from £12,300 to £6,000 from April 2023, and then to £3,000 from April 2024.

Business taxes

As announced previously, the original planned changes to Corporation Tax will now go ahead, meaning that from April 2023, the new tax rate will be 25%, but to help protect small businesses a £50,000 small profits rate will be introduced, set at the current rate of 19%. Once a company’s profits rise above £50,000 a taper will apply, so that only businesses with profits above £250,000 will have to pay the full 25% rate.

Employers’ NIC thresholds are to be frozen, and the Employment Allowance remains at £5,000 per year.

The VAT threshold to remain at £85,000 for 2 years.

Company Electric Cars

With the price of fuel soaring and the government encouraging more people to consider greener modes of transport, we are being increasingly asked about buying or leasing electric cars through a personal company.

Here we provide a brief summary of how this may benefit you, but please note this advice only applies to businesses who trade as a limited company (not ordinary self employed and partnerships).

Ordinarily, it doesn’t make sense for business owners to operate their own car that they will use for business and private use, through a limited company. This is because of the high taxable benefit charge that applies to most cars, to tax the private use element.

However, the government are currently offering an incentive to encourage ownership of pure electric cars, which means for companies, there is currently a very low taxable benefit charge. Therefore, even after paying the taxable benefit charge and additional National Insurance on the car, there is likely to be an overall tax saving, after factoring in corporation tax relief on the cost of the car and running costs.

There are still downsides to consider though:

  1. The cost of electric cars is still relatively high compared to petrol cars, which means any tax saving may be wiped out by the extra purchase or lease costs.
  2. The low taxable benefit charge is currently only suggested to last until April 2025, after which time, we don’t know if the government will raise the charge, or to what extent. That could then totally negate any saving at that point.

However, for some people who are in the market for a new car at this time, it could still be something to consider, but we would say that you would probably fit one of the following categories:

  1. You are currently in the market for a new car.
  2. You are interested in the option of ‘going green’ and the price is less of an issue.
  3. You have surplus funds in your company, that to extract to buy a car privately, would incur additional taxes that could be avoided by buying a company vehicle instead.

It is quite a complex scenario and isn’t the correct option for everyone, but if the idea of a company electric car interests you, please ensure you discuss this with us first before you buy or lease one through the company, because it must be reported to HMRC immediately, and the benefit in kind taxes calculated.

Minimum Wage Changes

From 1 April 2023, the National Living Wage and National Minimum Wage rates will increase. The new rates will be as follows:

  • Aged 23 and over: £10.42 per hour
  • Aged 21 to 22: £10.18 per hour
  • Aged 18 to 20: £7.49 per hour
  • Aged 16 to 17: £5.28 per hour
  • Apprentices: £5.28 per hour

Salaried employees

Employers will need to check if the above changes affect any employees who are paid a fixed salary, rather than variable hours. The salary must be no lower than the equivalent hourly rate calculated by reference to their normal contracted hours.

Non-payrolled employees

If you don’t currently operate a payroll scheme because your employees earn less than the Lower Earnings Limit (LEL), you will need to check whether this increase affects you. From April, the LEL will remain at £123 per week, above which employees’ wages must be reported on a payroll scheme.

National Minimum Wage Pitfalls

Employers should also make sure any calculations of minimum wage levels take account of other circumstances that might occur in the workplace. This previous article provides some examples here.