The cost of a staff party or other annual entertainment is allowed as a deduction for tax purposes. Also as long as the criteria below are followed, there will be no taxable benefit charged to employees:

1.            The event must be open to all employees at a particular location.

2.            The cost is only tax deductible for employees and their partners (which would include directors in the case of a company) but not sole traders and business partners in the case of unincorporated organisations.

3.            An annual Christmas party or other annual events offered to staff generally is not taxable on those attending provided that the average cost per head of the functions does not exceed £150 p.a. Partners and spouses of staff attending are included in the head count when computing the cost per head attending.

4.            All costs must be taken into account, including the costs of transport to and from the event or accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring. No deduction will be allowed for the £150 exemption.

5.            VAT input tax can be recovered on staff entertaining expenditure. If staff partners/spouses are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

Gifts

A final note on ‘Trivial’ gifts for employees.

Employers may find the following Revenue concession useful – we have copied the note directly from the HMRC handbook:

“An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned.”

One final cautionary note regarding VAT and staff gifts, VAT is chargeable by the employer when an employee receives gifts totalling more than £50 in a year. Turkeys however, are zero rated for VAT purposes!

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In the past as long as you paid your tax liabilities on time and cleared any self-assessment tax due by 31 January, no late filing penalties were due. Even if you failed to pay your tax on time, late filing penalties were capped at £100 or nil if you were due a tax refund. The goal posts have moved! The 2010-11 tax returns have to be filed by 31 October 2011 if you are filing a paper return, or 31 January 2012 if you are filing electronically. If you fail to meet these deadlines you face the following penalty regime, even if your tax payments are up-to-date.

* One day late an initial penalty of £100.

* Three months late a daily penalty of £10 per day up to a maximum of £900.

* Six months late an additional £300 or 5% of any tax outstanding, whichever is the higher amount.

* One year late a further £300 or 5% of any tax outstanding, whichever is the higher amount.

As you can see the minimum penalty for filing 6 months late is £1,300 even if all your tax due is paid on time or you are due a tax repayment. If you have had a relaxed attitude to meeting the filing deadline in the past; you may like to reconsider your priorities for the filing of the 2011 return!

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HMRC have published revised Company Car advisory fuel rates to use from 1 September 2011.
These rates can be used to calculate private fuel costs reimbursed by employees on a mileage basis, or to calculate the amount of VAT input tax that employers can recover on company car mileage claims that are attributable to fuel rather than other running costs.

Petrol and LPG users (Engine size, Petrol, LPG pence per mile)

1400cc or less: 15p, 11p
1401cc to 2000cc: 18p, 12p
Over 2000cc: 26p, 18p

Diesel users (Engine size, Diesel pence per mile)

1600cc or less: 12p
1601cc to 2000cc: 15p
Over 2000cc: 18p

Business owners might want to bring forward plans to invest in machinery, before the qualifying amount is reduced.

This allowance is called the Annual Investment Allowance (AIA).
It enables all businesses to reduce their profit by the amount spent on plant and machinery (excluding cars) up to a maximum amount, currently £100,000 but set to reduce to £25,000.

Where an accounting period spans 1 April 2012, the maximum amount of AIA is calculated on a pro rata basis
eg 6 months @ £100,000 +
6 months @ £25,000 = £62,500

There are also allowances for environmental equipment, known as Enhanced Capital Allowances (ECA). The relief under these will continue to be 100% on the amount spent. The categories of expenditure are:
Energy Saving Equipment. The equipment must have been certified as meeting energy efficiency criteria
Water-efficient Equipment. Again the equipment has to have been certified as reducing water use, improving quality, or saving energy
Electric Cars and Low (up to 110 g/km) CO2 emission cars

This case has potentially wide ranging implications for other employers. Please do get in touch if you would like further guidance in this area.

The case (TC01286: Hok Ltd) concerned an appeal against a penalty of £400 for late filing of the 2009/10 P35. The penalty was calculated at £100 per month for four months. In October 2010 a further penalty of £100 was issued, given that the filing had taken place on the 15 October 2010 once the company had been alerted to its default.

The company argued that it thought it did not need to file the appropriate returns because its only employee had ceased employment part way through the year. It acknowledged that it was wrong and that HMRC was entitled to levy a penalty. However, the company argued that, if HMRC had notified it of its default, it would have been remedied it a far earlier time, thus avoiding ongoing penalties.

During the Tribunal HMRC stated that it runs a:

‘…structured programme to enable penalties to be issued regularly throughout the year, rather than waiting for the late return to be submitted and then issue a final penalty. These penalties, although aimed at encouraging compliance and having the effect of reminding are not designed to be reminders for the outstanding return.’

The Tribunal was amazed by this and stated that:

‘….HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default.’

‘There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing.’

‘In our judgement it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice was sent out immediately after the 19 May in any year, instead of some four months later. That might generate less penalty cash for the State, but it would be fair and conscionable as between the taxpayer and the State (acting by HMRC).’

‘As, in our judgement, HMRC has neither acted fairly nor in good conscience, in the manner described above, we do not consider that any penalty is recoverable over and above the £100 penalty for the first month unless HMRC proves (the onus being upon it) that even if such a penalty notice, which would have acted as a reminder, had been issued, the default would nonetheless have continued. It has proved no such thing.’

‘Tax-related regulation was deemed to be the most costly area of red tape, leaving smaller employers with a bill of £5.1 billion per year,’ the FPB said.

‘Employment law was second at £4.2 billion, followed by health and safety law at £3.8 billion. These results were quite different compared to the 2009 Cost of Compliance survey, which put employment law in first place, followed by health and safety in second and tax third.’

Forum members estimated that ‘they have missed out on business opportunities worth £29.8 billion due to the time and resources they spend on dealing with regulation’.

The total annual cost of compliance with legislation for the UK’s ‘smaller employer’ is estimated at £16.8 billion or £14,200 per firm, the FPB said.

‘While this is a rise of just 1% compared to two years ago, the increase is greater in real terms because economic activity, which drives the need for compliance, has shrunk significantly since the 2009 survey was carried out,’ said Jane Bennett, Head of Campaigns at the FPB.

So, what are the tax implications of giving them a helping hand?

If they are aged 18 and above, the simple option is to make a gift of the deposit. You can provide a guarantee to the mortgage company. The gift of the deposit will be brought into the inheritance tax computation, but only if you die within seven years of making the gift.

If the children are under 18 the easiest option is to buy the property yourself (or yourselves, husband and wife together) and to gift it to the child when they become 18. There will be capital gains tax (CGT) to pay, if the property has gone up in value since you bought it. CGT is charged currently at up to 28%. The first £10,600 of gain per parent is exempt, and it is possible to give away a proportion of the house over a number of years. Although bear in mind the value of the property could go up, as you wait for another year to go by!

Perhaps a better option is to purchase the property in the first place with the child as beneficial owner, and the parent(s) as legal owner. This can be done with a simple declaration of a bare trust (held in the parent(s) name on behalf of the child. It is wise to get a solicitor to draw up the paperwork for this. This might make it more difficult to obtain a mortgage, a good broker should be able to help.

If the property is let, the income will be assessed on the parent(s). There is a way around this, if someone other than the parent(s) can provide the deposit, for example perhaps grandparents. Warning, do not think you can ‘give’ the deposit to someone, who can then give it to your child, this would be fraud!

Another option would be to set up a trust for your child or children, which could buy property. This is a complicated area, and professional advice is required.

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HMRC are actively searching the internet for evidence of eBay traders that are consistently selling goods on eBay. They are known to be exploring the use of ‘internet robots’ to scour cyberspace!

And this activity is not necessarily restricted to eBay traders. What about car boot sales, sales via classified ads? Which raises an interesting question – when does a hobby become a trade, and more importantly, when do any surplus funds become subject to tax?

Generally speaking if you are selling your own private possessions you will not be trading. However you may be considered ‘in business’ if you habitually buy and sell goods on eBay and/or at car boot events. The list that follows is the published ‘badges of trade’ that HMRC use when considering this matter.

1. An intention to make a profit supports trading.
2. The number of transactions involved – systematic and repeated transactions support trade.
3. The nature of the goods sold – are the goods only capable of being turned to advantage by being sold? Or do they yield income, or give enjoyment through pride of ownership?
4. Existence of similar trading transactions – was this a one-off transaction or part of a pattern that suggests trading?
5. Changes to the goods – were the goods repaired, modified or improved to sell them more easily?
6. The way the sale was carried out – were the goods sold in a way that indicates trading, or to raise cash in an emergency?
7. The source of finance – was money borrowed to buy the goods? Were any profits to be used to repay the loan?
8. Interval of time between purchase and sale – goods being traded are usually bought then sold quickly
9. Method of acquisition of the goods – goods acquired by an inheritance, or as a gift, are less likely to be the subject of trade

As you can see one or more of these cases could apply to most hobbies.

The current penalty regimen adopted by HMRC precludes sticking your head in the sand. Don’t wait for the brown envelope to appear. If you are uncertain about the tax status of your money-making hobby call us now.

Related articles

• Taxman turns his sights to online auction sites (independent.co.uk)

Tax relief is obtained by utilising the Annual Investment Allowance. For the current tax year, 2011-12, this amounts to a 100% write off with a limit of £100,000.

As with most opportunities all good things come to an end! From April 2012 the annual limit is being reduced to £25,000.

So if your plans over the next year or so include substantial investment in replacing worn out, or buying new, qualifying equipment, timing is absolutely critical.

Call us if you would like more information about these changes.