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December 2008 is likely to be known as the Christmas Credit Crunch, when office parties, gifts and general carousing are rather more restrained than usual. One suspects that those who still manage to scoop a decent bonus at the end of the year, are likely to keep quiet about it for fear of being lynched by those who, for the first time, are facing a down-sized Christmas. Let’s look on the bright side, however. As far as we can see, most contractors are still in work and many are earning decent fees. Therefore some may be inclined to give gifts to their clients or indulge in traditional client entertaining. For those with, perhaps a few employees, a Christmas thrash may still be one the cards. In many cases, venues were booked during happier times, and the cancellation costs may well be greater than going ahead and enjoying yourself. And if you are still in business and your clients and agency contacts have done you proud, then perhaps a thank you gift, or Christmas lunch or dinner, may still be a welcome gesture. While no gifts are tax allowable if you work within an umbrella company, those who operate through limited companies do have some flexibility for offsetting part of the cost. However, on the principle that there is no such thing as a free lunch, our good friends at HMRC are keen to ensure that all these Christmas goodies come at a price – in the form of tax and NIC owing to the Revenue in return for your largesse. As always, the rules are complicated and in some cases slightly surreal, but as we all know, ignorance is no excuse in the eyes of the taxman. So let’s look at the details. 1.Christmas gifts to Clients/Agency contacts Gifts to clients and agency contacts are usually treated as entertainment expenses, and so are not generally tax-deductible. This includes alcoholic beverages, food hampers cigars/cigarettes and gift vouchers, even if they are only worth a few pounds. This rule does not apply however, to promotional items, such as pens or diaries that feature your logo prominently, or free samples of your own products. In this case, you can claim the VAT back as long as the gift has not cost you more than £50 (excluding VAT). You can even give several gifts to the same person during a 12-month period, providing their total value is not more than £50. But remember; forget fancy wrapping if the value of the gift is close to the £50 mark because HMRC may then deem the total value to be above the permitted limit for tax deductability. 2.Christmas gifts to Staff Gifts to staff, including Christmas gifts, are classed as taxable benefits, although if HMRC thinks they are ‘trivial’, they will be exempt from tax. Any non-monetary, ‘non-trivial’ gifts, must be included on form P11D. If you are feeling really generous and don’t want your staff to pay any tax or NICs on your gift, you can set up an arrangement with your Inland Revenue office called a PAYE Settlement Agreement (PSA). If you set up one of these, you have to pay the tax and NICs that is due and in doing so you relieve your employees of any tax liability. However as a contractor, you probably do not employ enough people to make all this paper work worthwhile, but at least the option exists. If you give staff non-cash vouchers that employees can exchange for goods, these will be subject to tax and Class 1 NICs. For tax, you should enter the cost of providing the vouchers on either a form P9D or a form P11D at the end of the tax year. For NICs, the cost of providing the vouchers should go through the payroll at the time you give them to the employees. HMRC is not very precise as to what it deems to be ‘trivial’. Indeed you may have to play a game of Trivial Pursuit to ensure you get the rules right. HMRC admits itself that there are no set rules for determining the type of benefit that is ‘trivial’, and there is no set monetary limit below which benefits are deemed to be so. However in general terms, HMRC states that ‘trivial’ benefits are often, but not always, perishable and/or consumable. Its official line is that there will be instances where you have to apply common sense and judgement both to the type and the amount of benefits that may be trivial. You just have to hope that your interpretation of common sense is the same as theirs! You can provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine (i.e. a £3 bottle of Aldi red plonk as opposed to a bottle of Moet et Chandon) or a box of chocolates at Christmas. All of these gifts are considered to be ‘trivial’ and as such are not taxable. Furthermore, there is no monetary limit to the number of tax-free ‘trivial’ gifts you can dish out, though as a contractor, you are unlikely to be handing out many staff gifts, Once you start handing out cases of wine or the Christmas hamper, things start to become slightly surreal. HMRC says that you will need to consider the contents and cost before being able to determine whether the benefit is ‘trivial’. In such cases you should treat all the factors objectively and use your judgement. I suppose if you are tight fisted, a whole case of Aldi plonk might seem like a big gift. If you are a Russian Oligarch, a case of finest champagne would be a mere bauble. 3.Cash gifts to Staff HMRC considers cash gifts or bonuses as the same as normal pay and they are therefore subject to tax and Class 1 NICs in the usual way. These payments should be put through the payroll. This also applies to any vouchers you give that can be exchanged for cash. 4.Client/Agency entertaining Sadly, there is no way you can set the cost of Christmas entertaining of clients and agency contacts against tax or even claim back the VAT. However, if you do have a few staff members and you want to treat them to a Christmas meal or party, your staff will not have to pay tax or NICs, providing the total cost per head for all annual functions, does not cost you a penny more than £150 a head. Alternatively, if you want to invite employees’ partners, this remains tax free providing the total cost for the events does not exceed £150 per capita – where per capita is calculated on the basis of the number of total attendees either – i.e employees and their guests. Although only one guest per employee is permitted under these rules, that still means a potential tax-exempt benefit of up to £300 per employee. However, if the cost per head of the event goes over this limit, let’s say £175, then the employee would be liable for tax on a benefit of £350. So when it comes to office parties, you can reasonably argue that you are doing your employees a favour by cutting out the caviare and champagne! You should, however, bear in mind that the £150 per capita allowance covers the aggregate of all company functions in the tax year, so take into account any spend you may have had on a summer event, for example. You should calculate the total cost of putting on the function by including accommodation, transport, food, drink and then, as mentioned, dividing it by the total number of guests, including non-employees. After you have negotiated all this Revenue red tape, you may have rather lost the will to give anything to anybody and quietly, like Scrooge, mutter Bah Humbug and lock your cash in the safe. Yet Christmas is meant to be the time for giving, so if this means the Revenue will do its share of taking at the same time, just accept it in good spirit. Goodness knows the Treasury needs all the revenue it can get at the moment! Rick Flood is a director at JSA, one of the UK’s largest firms of service providers for contractors Dec 11, 2008 Email this article Printer friendly page Previous Page
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