There’s no better time to reward staff and customers than at Christmas. But the tax man is less generous than Santa and there are certain clauses you need to be aware of before you start popping £50 notes into envelopes to hand out over mulled wine round the office tree.

1. Christmas parties: the cost of these or another annual function is an allowable tax deduction for businesses. This doesn’t however apply to sole traders or business partners of unincorporated organisations (but it will apply to their employees). There will be no chargeable taxable benefit for the employee as long as:
  • The ‘do’ is open to all employees, or all at a particular location if you are a multi-site operation
  • The cost per head isn’t more than £150 (the average cost per head mustn’t exceed that amount throughout the year) to include transport or accommodation provided. If the £150 limit is exceeded, staff will be taxable in full on total cost per head.
  • VAT is recoverable on staff entertaining expenditure but not for partners so input VAT will need to be apportioned.

2. Client entertaining is never an allowable deduction for business tax purposes and input VAT cannot be recovered on it.

3. Business gifts to customers are only allowable as a tax deduction if the total cost to one individual per year is less than £50, the gift bears a conspicuous advert for the business and it isn’t food, drink, tobacco (unless they’re samples of your products) or exchangeable vouchers.

4. Gifts to staff: HMRC will consider a benefit exempt if it is deemed to be a trivial benefit. For it to be considered a trivial benefit, it must cost £50 or less, and not be part of the employees contract or a reward for performance. It must also not be cash or a cash voucher. Therefore seasonal gifts such as a turkey, bottle of wine or box of chocolates are likely to be exempt.

5. Vouchers: Cash vouchers are subject to tax and National Insurance. Non-cash vouchers up to £50 may be considered a trivial benefit and therefore exempt.

6. Christmas bonuses: these are subject to PAYE and NI as additional salary.

7. Inheritance tax issues: All individuals have an annual exemption of £3,000 for gifts. Gifts of less than £250 a year to each individual are exempt. Any gift above these amounts could be considered a Potentially Exempt Transfer which is exempt from Inheritance Tax provided the donor survives for seven years. All gifts to spouses are exempt for Inheritance Tax purposes.
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1. If you set up as a sole trader, you can claim against your profits for items used in your business even if you bought them before you began trading.

2. Think about incorporating your business – lower corporation tax rates may make it worthwhile to become a limited company, although recent changes have made this less attractive than previously.

3. The current capital allowance scheme (tax deductions that you can claim for spending on business equipment) allows you 100% allowance on the first £200,000 spent on eligible capital items. If you’re thinking about buying plant and machinery, committing to buy before your year-end can allow the entire cost against profit for that year.

4. Consider how you extract profits from the business. If you set up a limited company, paying a small salary up to your personal allowance and the rest as dividends could still save some tax and national insurance. It may also be beneficial to pay your spouse for the work they undertake, dependent upon their other income.

5. Put your mobile phone in the name of the business then all phone costs are tax deductible.

6. It’s usually best to run your own vehicle and claim mileage using HMRC authorised mileage rates. If you have a limited company, in most cases this will also avoid higher tax on company cars.

7. If you work from home you can claim a tax deduction to cover part of your home running costs. HMRC allows (a modest) £4/week without asking for any evidence. If you think the actual cost is higher (based on proportion of home used for work purposes) then a bigger claim may be made, but be prepared to justify it.

8. If you’re married or in a civil partnership, make the most of each personal allowance (£11,500 for 2017/18) and basic rate tax bands (£33,500 for 2017/18). It might be sensible to transfer income-producing assets (such as rental income) to a spouse to take advantage of their lower tax rates.

9. Make contributions into a pension scheme. Pension contributions tend to be deductible expenses for the company, and individuals do not pay tax on the benefit of having the company pay them. If your net income for 2017/18 is more than £100,000, your personal allowance (£11,500 for 2017/18) will be reduced by £1 for each £2 of income in excess of £100,000. Consider making individual pension contributions or a transfer of income-producing investments to a spouse to make the most of personal allowances.

10. If you employ people, use a salary sacrifice scheme to pay for employees’ childcare costs. Childcare voucher schemes are tax-free for the employee (there are some restrictions) and the business doesn’t have to pay employer’s National Insurance.

For more tax saving advice please do not hesitate to get in touch with our experts.
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HM Revenue & Customs (HMRC) has the authority to investigate the tax affairs of all taxpayers and seems increasingly willing to use this power to raise money for the government.

The latest figures show that the number of enquiries launched by HMRC in the year 2011-12 doubled to 237,215 with the receipts of HMRC’s compliance efforts totalling £16.7 billion.

HMRC’s primary line of enquiry is by way of a compliance check, which despite its name is a formal tax investigation. The opening of the investigation is by way of an Information Notice, which requires the taxpayer to provide answers to the questions raised by HMRC. A compliance check is separate to an enquiry into a tax return submitted by a tax payer.

To start a compliance check HMRC must have reason to suspect that tax has been underpaid. A compliance check cannot be a ‘fishing expedition’.

Why the increase in compliance checks?

Part of the reason for the increase in compliance checks is that HMRC have improved their analysis of the data they receive from third parties – such as banks with details of the accounts held by an individual. HMRC are also now collecting more information on property sales, so more checks following the sale of a property can be expected.

A considerable amount of the information received by HMRC will not have all the necessary details to determine whether tax has been underpaid.

For example a bank account may be in the name of a grandparent but the money is held for the benefit of a grandchild. From the initial information held by HMRC it seems that the grandparent has undeclared income and therefore it would be reasonable to launch a compliance check. The compliance check may then be dealt with quite quickly by responding to HMRC that the interest received on the bank account in fact belongs to the grandchildren and providing evidence to support the answer.

What happens if a compliance check finds that tax has been underpaid?

If a compliance check does result in a finding that tax has been underpaid then HMRC will collect the tax by raising an assessment. In addition to any tax payable the taxpayer may also face penalties for late payment. In addition, HMRC can charge additional penalties for non-disclosure of taxable income or gain. The non-disclosure penalties are reduced for co-operating with HMRC and providing the reason why the income or gain was not originally reported to HMRC.

The late payment and non-disclosure penalties can exceed the actual tax payable.

If tax should have been paid on an income source for the tax year ended 5 April 2014 the time limit for raising an assessment will only expire on 31 January 2015.

The normal time period during which tax may be assessed under a compliance check is 5 years and 10 months after the end of the tax year concerned.

The time limit can be extended up to 20 years in cases where there is negligent or fraudulent conduct by the taxpayer.

What to do if you receive an Information Notice from HMRC:

1. Keep calm
2. Decide whether you need professional assistance before you reply to HMRC.
3. Gather the information needed to provide a full answer to HMRC before replying to them.
4. Only provide HMRC with the information they need to deal with the questions they have raised.
5. If when reviewing your papers you do notice that tax has been underpaid consider whether a payment on account of tax due should immediately be sent to HMRC.
6. If you are not able to meet a deadline set by HMRC for you to provide an answer then contact them in advance and agree with them a revised deadline.
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