Christmas Gifts from the Taxman?

Many firms are foregoing expensive Christmas parties this year and as an alternative are giving small seasonal gifts to staff and customers.But before you break open the hampers consider what may be allowable for income or corporation tax purposes, and what VAT you can reclaim.

- Gifts to customers of the products or services you normally sell are tax allowable, as long as you are not in the food business.
- Small promotional gifts of any item are also treated as tax allowable for your business if they cost less than £50 each and carry a clear advertisement for the business. However, you cannot get income tax or corporation tax relief for the cost of gifts of food, drink, tobacco and gift tokens of any value (Boooooooooo!)
- A number of gifts worth more than £50 in total should not be made to the same person in any 12-month period.
- If you are VAT registered you can reclaim the VAT on small gifts that cost up to £50 each, including gifts comprising of tobacco and alcohol.
- If the gift cost more than £50 (net of VAT) you must account for the VAT on the item as if you had sold it at cost.

Gifts to your staff are tax allowable, but your employees could be taxed on the value of the gift as a benefit in kind. In that case you would also have to pay Class 1A NI on the value of those gifts. The Taxman does consider some small items to be trivial benefits, which can be given as tax-free gifts to staff members. Trivial items can include seasonal gifts such as a turkey, an ordinary bottle of plonk (not fine vintage or champagne), or a box of chocolates.

Where you are considering making larger gifts to each employee such as a Christmas hamper, you can include the cost of those gifts in a PAYE Settlement Agreement (PSA) with the tax office. The PSA allows you pay the tax and NI due on behalf of your employees.

New Chance To Claim Benefits

If your income has dropped in the current tax year, perhaps
because your business has made a loss, or your company can't
afford to pay you a salary, you could be eligible to claim tax
credits or other state benefits. The Tax Office is actively
encouraging people to check whether they would be eligible to
claim working or child tax credits, and has included an
interactive questionnaire on its website to help you decide.

The questionnaire does not cover complex claims such as where a
member of the family has a severe disability, but it will cover
most situations. Remember a claim for tax credits is based on
your family's total income, so you need details of your partner's
or spouse's income as well as your own.

If you are aged 60 or over, you may be eligible to claim pension
credit from the Department of Work and Pensions (not the Tax
Office). You don't have to be retired to claim pension credit,
just aged 60 or more. Like tax credits your claim is based on
your income as a couple, not just your income alone. If you have
savings of over £10,000 these are also taken into account. This
savings threshold was £6,000 until 2 November 2009, which
excluded a lot of people from qualifying for this benefit.

If you find you are eligible for pension credit or tax credits,
you should check whether you could receive help to pay council
tax or housing benefit. Claims for both of these benefits now
ignore any income received by the family as child benefit.

What To Do When A Customer Goes Bust

In these troubled times the failure of one business can have a
knock-on effect on its suppliers. If one of your customers goes
down you need to quantify the bad debts created by that failure
as soon as possible.

Say your accounting year end is 30 June 2009, and one of your
customers fails in October 2009 leaving the sales invoices it
received in April, May and June all unpaid. Where it is clear
that you will not receive payment from the liquidators or
administrative receivers of that business for those sales
invoices, you can include the bad debt built up between April and
June 2009 in your accounts to 30 June 2009. This applies as long
as your June 2009 accounts have not been finalised by the time
you receive confirmation of the bad debt. Any sales made to this
customer between July and October 2009 will need to be written
off in your accounts to 30 June 2010.

This is a clear example of business failure, but bad debts can
also arise where your customer is still trading. Before we
finalise your accounts to submit them to the Tax Office or to
Companies House, we need you to undertake a thorough check of all
your sales debts. Where you can identify specific debts that are
unlikely to be paid, and you have made every effort to recover
the money due, those amounts need to be written off in your
accounts. This will reduce your taxable profits, and avoid you
paying tax on money you are very unlikely to receive.

VAT on bad debts can only be reclaimed six months after the due
date for payment for the invoice. You must also pay over the VAT
due to the VATman before it can be reclaimed. If you use the cash
accounting scheme for VAT you automatically get relief for unpaid
sales debts, as you do not account for the VAT due until the
sales invoice is paid. Any business with a turnover of under
£1.35 million can join the cash accounting scheme.

Tips and Service Charge Changes

From 1 October 2009 tips, gratuities, and service charges cannot form part of the national minimum wage of your staff who receive those payments. This applies even if the service charge is a compulsory part of the customer's bill. The Tax Office has reissued leaflet E24: Tips, Gratuities, Service Charges and Troncs to explain this point clearly.

If tips are paid directly to your staff by the customers, those employees should declare the amounts they receive in tips to the Taxman on their personal tax returns, but you don't have to worry about the tax situation. Where the tip is paid to you as the employer, perhaps as an additional amount on the credit card bill, and you decide how to distribute the total tips pool (known as tronc), among your staff, you must deduct both PAYE and NICs at the relevant rate for each employee.

Where someone else manages the tronc, perhaps the manager who is not the employer, that manager must deduct PAYE but not NICs from the payments of tips to staff. Please talk to us if your uncertain about how to handle tips paid to your staff.