The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
It is a cause of bafflement to many business people to learn that entertainment expenditure is not deductible for tax purposes. But that is the law and we must accept it.
The dividing line between what is and what is not entertainment is not always easy to judge. The following interesting snippet appeared recently in the newsletter of Berg Kaprow Lewis.
Question: I am a business consultant. I know ‘entertainment’ has to be added back but I often use coffee shops as meeting venues. It’s cheaper and much more convenient to buy a couple of coffees and croissants and have a meeting there than to rent a meeting room or a serviced office. But over a year the costs do mount. Can I claim tax relief on the basis this isn’t in truth or in substance ‘entertainment’ but simply a cost of hiring somewhere to meet?
Answer: Sadly not. The law denies relief for ‘expenses incurred in providing hospitality of any kind’. As a matter of fact the expense you incur is that of buying a coffee and croissant, which are provided to the client. Giving the client a coffee and croissant is ‘hospitality’, whichever way you look at it. So HMRC will not accept that the expense can be anything other than an expense in providing hospitality. The fact that you are buying the comestibles only in order to be enable you to hang out at the premises doesn’t alter things. What you are in fact paying for is the food and drink, not room hire.
The tax position (and possibly your health) would be improved if you paid for the coffee and croissants and told the barista to pour the former down the sink and give the latter to the cat. There would then be no hospitality (except to the cat, which doesn’t count). Alternatively, you could pay an amount equivalent to the price of coffee as a fee to hang out at Starbucks for an hour (which is certainly neither entertaining nor hospitable). In practice neither of these alternatives is likely to be palatable.
A few weeks ago my younger son mentioned that a friend of his, who works for a broadband provider, receives virtually free broadband as part of his remuneration package.
“Ah! A tax-free, in-house benefit! Lucky boy,” I replied.
Looking at the blank expression on his face I took it upon myself to introduce my son to the fascinating subject of in-house benefits.
Anyone in employment who receives a benefit from their employer knows that such things are reported to HMRC and they end up paying tax on the value of the benefit. In the main the measure of this value is the cost to the employer. So, for example, if an employer provides medical insurance for an employee at a cost to the employer of £100, that is the amount of the benefit on which the employee is charged to tax.
Back in the eighties Malvern College allowed its staff to have their children educated there for a fee equivalent to one-fifth of that paid by outsiders. This facility was only available because the school had spare capacity.
The staff accepted they received a taxable benefit. The question was what was the cost to the employer? HMRC contended that the cost of running the school should be divided by the number of pupils attending in order to arrive at an average cost per pupil and that that should be the measure of benefit (less the amount actually paid by the staff).
The employees argued that the cost should be determined on a marginal cost basis. The school, having admitted all the pupils it could under its admissions policy and having committed itself to the largely fixed costs associated with educating those children, found itself with spare capacity. The extra cost associated with allowing an extra child to study there was negligible and was certainly covered by the one–fifth fee paid by the staff.
For reasons with which we are not concerned in this article the case went all the way to the House of Lords where the decision went in favour of the taxpayers.
So the measure of benefit for an in-house benefit is the marginal cost to the employer.
What is the marginal cost to a broadband provider of providing a broadband service to one extra customer? Pennies. This is why my son’s friend enjoys tax-free broadband, why airline staff enjoy tax-free flights and why senior employees in large accountancy practices get their tax returns done tax-free.
Now who do you wish you worked for?
YEAR END PLANNING
Nearly the end of the tax year. Outcomes are coming into focus. Will you have a high marginal tax rate?
If your total income falls somewhere between £100,000 and £120,000 you have a marginal rate of tax of 60%. So for every £1 by which you can reduce or postpone your income you save tax of 60p. That has got to be worth acting upon.
Pension contributions are the obvious answer. And how! 60% tax relief on the way in. Probably a much lower rate (perhaps even nil) when you (or your beneficiaries) draw your money out.
Postponing salary and / or dividends around
5 April is another possibility. This is do-able if you have your own company or a flexible employer.
Gift Aid payments. Better a favoured charity than some dubious government pet-project.
And it is not only those with incomes of £100,000 plus who find themselves on high marginal rates. Those with incomes between £50,000 and £60,000 and in families in receipt of child benefit suffer a withdrawal of benefit. For every £100 of income over £50,000 they lose 1% of their child benefit. Former students with incomes above £16,910 have to pay 9% by way of loan repayment for every £1 above that threshold.
Our Advice: Income management during March can reap very worthwhile rewards.
2.8% fixed for one year.
4.0% fixed for three years.
What’s not to like if you are eligible?
It is no surprise these bonds, issued by National Savings and Investments (NS&I), are popular. This is a vote buying exercise on a massive scale.
But has the Treasury snatched a small defeat from the jaws of victory?
A good many of the investors in these bonds will be non-taxpayers. Usually NS&I pays interest gross. But some bright spark has decided that interest will be paid net with no facility for investors to apply for gross payment.
You can imagine the thinking at the Treasury. If we pay gross that damages our cash flow and we can’t rely on the taxpayers to declare and pay the tax on their interest. So let’s pay net and leave it to the non-taxpayers to claim the tax back. That way they have all the hassle of making a claim. Many won’t bother. Many won’t even realise they can claim. Result!
Peter starts his new job at the zoo and is given three tasks. First he has to clear the exotic fish pool of weeds. As he does this a huge fish jumps out and bites him. To show who is boss, Peter beats it to death with a spade. Realising his employer won't be pleased, he disposes of the fish by feeding it to the lions, as lions will eat anything.
Whilst carrying out his second job, clearing out the chimp house, Peter is pelted with coconuts. He swipes at the two offending chimps with a spade, killing them both. What can he do? Feed them to the lions, Peter says to himself, because lions eat anything. He hurls the bodies into the lion enclosure.
Peter moves on to the last job which is to collect honey from the bees. As soon as he starts, he is attacked by a swarm. He grabs the spade and smashes the bees to a pulp. By now he knows what to do and throws them into the lion enclosure because lions eat anything.
Later that day a new lion arrives at the zoo. He wanders up to another lion and says, 'What's the food like here?'
The lion replies, 'Absolutely brilliant!..... Today we had fish and chimps with mushy bees.'
Copyright: K P Bonney & Co LLP 2015. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer: The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.
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