The Fizz! Blog

Tax at Christmas (COVID edition)

Around this time of year, we usually publish a reminder about the tax rules around Christmas parties and gifts.  Of course, there's a big change this year, which is that it's rather unlikely that many employers are going to be holding Christmas parties in person.  However:

• If you decide to defer your Christmas party until some time in 2021 when (hopefully) you'll be able to hold it in a safe and legal way, you'll still be able to benefit from these allowances - an annual event is an annual event, even if it happens late.
• HMRC have confirmed that if you decide to hold some kind of event online - so, perhaps you provide everyone with their food and drink at home and all meet up on Zoom - then that event is covered by those allowances too.  To be honest, it's perfectly obvious that such an event will be covered, and we're not quite sure who would have asked for confirmation from HMRC, but there it is for avoidance of doubt!

So, having said that, the framework remains the same as ever.  If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67 in the long run, once they've got the VAT back and saved corporation tax on what's left.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift (as we've written before, sporadic gifts and benefits each valued at £50 or less are now explicitly considered trivial by HMRC).  Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67.  Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer a bottle of whisky then that's still completely fine, and may well make great business sense!  It's just that for every £100 you spend on gifts like that, it costs your business the full £100 - you can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Winners and losers in the extended Job Retention Scheme

So, after accountants and employers spent a lot of time getting to grips with the first (fairly pointless) and second (somewhat more attractive) iterations of the proposed Job Support Scheme, it's been scrapped.  Instead, the existing Job Retention Scheme has been extended until at least March.  The scheme mostly continues as before, but since it's designed to admit new starters who didn't qualify first time around, there are some quirks.  Some people will do well, others badly.

• Anyone who was on the payroll back when the scheme first came into play has their furlough pay entitlement worked out on the same basis - by looking back to their 2019-20 pay.  That means that if they've had a pay rise or started to work more hours in 2020-21 and now get furloughed, they lose out.  Their entitlement will be based on their old, lower pay.
• However, it also works the other way round - if their hours have been decreased in 2020-21, their furlough pay will still be based upon their old, higher pay.  Lucky them.
• You might have two people doing the exact same job, at the exact same pay rate.  But if one of them started during 2020-21, whilst the other was on the books back in 2019-20, they could have different entitlements to furlough pay.  The newer starter's will be based on their September 2020 salary (if they're on a fixed salary).  The longer-standing employee's will be based on their pay back in February.  If they've had a pay rise since then, they lose out - it's not going to be reflected in their furlough pay.  And you could have an employee on variable hours who averaged 30 hours a week in 2019-20, and a colleague who averaged 10 hours a week.  In 2020-21, they might be averaging 20 hours a week each - but the first employee is entitled to three times as much furlough pay as the second.
• In the first phase of the scheme, an employee had to be furloughed for at least a solid three-week period in order to be eligible for the scheme.  That requirement has gone now, so employers experiencing some COVID-related decline in demand, but not enough to send anyone home for weeks at a time, will be able to get a bit of support previously unavailable to them.
• A lot of company directors missed out on furlough pay last time round, on the technicality that their payroll was filed annually, at year-end, so missed the cut-off date for the scheme (none of those directors were clients of this firm - we've always filed director payrolls on a monthly basis).  This time round, they're in.

Despite the oddities of the rules, some employers will choose to top the pay up of those employees who lose out because of the new scheme. This is not something all employers will be able to do though, and in all of these schemes there will be unavoidable unfairness.

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Can I invoice my client in Euros or Dollars?

We’re often asked if it’s OK for a UK business to invoice in a currency other than GBP.  It absolutely is, but it’s sensible to consider both whether you can *and* whether you should.

The first bit is easy.  Yes, you can invoice in any currency you like!  If you’re VAT-registered, the VAT amount needs to be converted to GBP and explicitly stated on your invoice, but if it’s a B2B sale you very likely won’t have to charge VAT anyway.

The second bit – should you? – is a bit more nuanced.  Invoicing in someone else’s currency represents a transfer of risk from them to you.  If you invoice someone in France for £3,000, then exactly how many Euros that is when the payment is due is their problem, not yours.  You’re going to get £3,000 (assuming they pay you, anyway).  But if you invoice them €3,500, and they make that payment to your GBP current account, then you don’t actually know how many pounds you’re going to end up with.  It just depends upon exchange rates on the day payment is made.  Your customer now knows exactly how much they’re going to be paying out, but you’re spinning the wheel and could do well or badly depending upon exchange rate movements.

In real life, very often you won’t have a choice – it’ll depend upon where the power lies in the relationship.  If you’re working for some US tech giant, you’re going to be pitching and invoicing in USD, no doubt.  But if there’s some room for negotiation, invoicing in GBP is going to give you more certainty.  On the other hand, if you’re a risk-taker, perhaps you’ll prefer to spin the wheel and see how much you end up receiving!

If a UK business is doing lots of business in another currency, it might consider opening a bank account in that currency elsewhere.  And we discuss that here.

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Should my business open a foreign currency bank account?

Just because your business is in the UK, it doesn’t mean it can’t have bank accounts in currencies other than GBP.  It could also have bank accounts in US dollars, Euros, or any other currency for that matter.  Why might you want to do that?

We don’t invoice in currencies other than GBP.  But if we did send an invoice for €800 to a customer, and they made payment to our (GBP) bank account, the bank would convert the €800 into GBP at whatever their own exchange rate was that day.  Maybe we’d receive more pounds than €800 would have bought when we sent the invoice, maybe we’d receive less.  We’d be taking some risk though.

If we were raising lots of invoices like that, we might decide to open a Euro bank account.  That way, our customer would pay €800 and we’d receive €800.  If we then immediately transferred that into our main GBP bank account, we’d be in exactly the same position as before and it would have been a waste of time.  But there are a couple of reasons why we might not do that.

First, we might have costs in Euros as well.  If we needed to pay €700 to a subcontractor, we could do so from the Euro account.  Then we’d have only €100 left, and the consequences of getting hit by a poor exchange rate are only one eighth what they were before (of course, the possibility of cleaning up because of a good exchange rate are also lower, but we’ve got rid of the volatility).  At this level it would be silly to do that of course, but if you’ve $1m of income and $800,000 of overheads each year, limiting the exchange risk to the net $200,000 might be very smart (in an extreme case, you could get the worst of both worlds otherwise and do badly on converting both the income AND the costs from GBP, getting hit by bad exchange rates on $1.8m of transfers!).

Second, even if you’ve got no costs in that currency, you might just want the flexibility to convert to GBP when you want to, not when the payments happen.  Maybe you feel like you’ve got a good handle on how exchange rates are going to move, or maybe you’ve observed a pattern and you’re happy to transfer money into GBP whenever the exchange rate hits a certain level.

For most UK businesses, it’s probably not worth it.  But the more foreign currency that’s flowing through your business, the more it’s worth thinking about.

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