The FreeAgent Blog

As Christmas approaches, you may be thinking of donating some money to charity from your business - or if you’re already doing this, you may be considering renewing or increasing that annual charitable pledge.

But did you know that you might be able to claim tax relief on that donation? Here’s some useful information to remember if you’re planning to give a charitable gift over the festive season. There are different things to bear in mind depending on what type of business you run, so we’ll take a look at the implications for both sole traders and limited companies.

Charitable donations and tax relief for sole traders

It’s your donation, not the business’s

If you are a sole trader, or in partnership, then a donation to charity wouldn’t count as a day-to-day running cost of your business.

That means that, if you pay the money from your business’s bank account, you would need to record this transaction as “drawings”, or a non-business transaction.

Claiming tax relief

But you may still be able to get tax relief on the donation, so long as you’ve made it under Gift Aid.

When you Gift Aid a donation, the charity can claim some money back from the government. This is the equivalent of basic rate tax on that donation - for example, if you give £10 to a charity under Gift Aid, then the charity will be able to claim an extra £2.50 back from the government.

If you are a higher-rate taxpayer, then you can claim tax relief on the difference between the basic rate tax relief the charity has already claimed, and the higher rate - so for your donation of £10, the charity could claim £2.50, and you would get £2.50 in tax relief, since the higher rate is 40% and the charity has already claimed 20% of that.

To claim this tax relief, you should record the donations in the main section of your tax return.

Keep in mind: have you paid enough tax?

Be aware, though, that when you make your Gift Aid declaration, you are saying that you will have paid enough tax for the tax year to cover the relief that the charity is claiming. If you don’t pay that much tax, then you must make good the charity’s relief to HMRC. For example, if a sole trader earns under the personal allowance of £9,440 in 2013/14 and has no other income, if they make a Gift Aid donation of £100, they would have to pay £25 in tax to HMRC - because that is the amount of relief the charity has claimed.

Charitable donations and tax relief for limited companies

Claiming tax relief

If your business is a limited company, you would normally be able to record any money the company gives to charity as a Payment of Charitable Donations in your accounts, and the company can use these donations to reduce its taxable profit. In other words, the company can claim tax relief on the donations by including them as a day-to-day running cost in its accounts, and therefore pay less corporation tax.

Keep in mind: donations that outweigh profit

Be aware though, that a charitable donation can’t be used to create or increase a company’s loss. Let’s illustrate that with an example.

It is Sample Ltd’s year end date and the company has made a profit of £1,000 in the year to date. Despite this small profit level it has cash reserves, so decides to make a donation of £1,500 to charity.

For tax purposes, the company has made no profit and no loss - because the donation can only be used for tax relief up to the limit of the profit. It can’t be used to create a loss.

If Sample Ltd had made a loss of £500 and decided to make the £1,500 donation, then the loss for tax purposes would still be £500 - not £2,000 - because the donation can’t be used to increase a loss.

Donations over £200 to any single charity must also be disclosed separately in the company’s accounts.

Above all, your accountant can guide you about the specific tax implications of your own charitable donations. If you’re not sure how to deal with money you’ve given to charity in your accounts or on your tax return, speak to your accountant for clarification.

‘Tis the season to be jolly, and for business owners, that often means celebrating the festive season with gifts, an annual Christmas party, or even just by decorating with some tinsel around the office. Unfortunately, just because it’s the festive season that doesn’t mean that tax rules disappear, so in this article we’re taking a look at the tax implications of some common Christmas costs for businesses.

Christmas decorations

Is your office full of Christmas cheer? The good news is, unless you work from home, you would be able to claim tax relief on the cost of Christmas decorations and a tree for your office, by putting these in your accounts as day-to-day running costs so that they reduce the amount of profit you pay tax on. If you do work from home (and even if you have dedicated office space within your home), HMRC would almost certainly say that these are for your personal enjoyment rather than for business, and wouldn’t allow you to claim them.

Gifts to clients

The festive season is a great time to show your customers how much you appreciate them - in fact, we’ve written a whole article about how you can go beyond the Christmas card to build great client relationships this Christmastime. If you do give your valued customers and suppliers a Christmas gift like some festive chocolates or bottle of wine, you should record the cost of these gifts as business entertaining. Unfortunately, you normally can’t claim tax relief or reclaim input VAT on these gifts, unless they:
  • contain a conspicuous advert for the trader (that’s your business), AND
  • are NOT food, drink, tobacco or a voucher that’s exchangeable for goods, AND
  • the cost of that gift and any others to that person in the tax year / accounting year is under £50

This is one reason why so many businesses give logo-embossed diaries, pens, and bottle openers as Christmas gifts!

If you’re registered for VAT, you have to pay VAT to HMRC if you make gifts worth more than £50 a year to any one person, so that is worth keeping in mind!

Christmas parties

Christmas parties are a great way to show how much you appreciate your employees and clients, but make sure you understand the different rules for tax - they can change depending on who attends your party.

Christmas parties for staff

The main tax implication of staff Christmas parties is whether you need to report the cost of the party as a taxable benefit for your employees - in some cases, you can throw a staff party without incurring any extra tax for you or your employees. Check out our full article about staff Christmas parties for all of the details and exceptions.

Christmas parties for clients

If you want to give a Christmas party for anyone other than your staff, HMRC would consider this to be business entertaining, so while you should still add it as a cost in your business books, when you are calculating your profit for tax you should add these costs back on, so that you don’t claim any tax relief. You also can’t reclaim any VAT on these costs - bah, humbug! If all of this sounds a bit complicated, remember that FreeAgent automatically handles the tax treatment of business entertaining costs!

Christmas bonuses for staff

If you have staff, you may want to give them a Christmas bonus or gift to show your appreciation for their hard work. Here’s some guidance about what tax impact your gifts may have:

Cash bonuses

If you’re paying your staff a Christmas bonus, this is treated the same way as regular earnings, so you should run it through the payroll and pay PAYE and National Insurance on it as normal.

Non-cash gifts

If the gift doesn’t have a cash value, for example if you gave your staff a turkey or a box of chocolates, then HMRC may well accept that it’s a “trivial benefit” - a small gift that’s given for personal reasons, rather than reasons relating to employment. For example, a box of crystallised fruit at Christmas could be trivial, but a long service award would relate to employment and so wouldn’t be considered ‘trivial’. If you’re giving a trivial benefit, you don’t have to report it on form P11D and don’t need to pay any extra tax or National Insurance.

If the gift does have a cash value, for example it’s a token or voucher, you would need to report that value on that team member’s form P11D. You would also have to pay class 1A National Insurance on the value of the voucher.

Unfortunately, HMRC aren’t so generous that they automatically give tax relief just because a cost relates to Christmas! As ever, if you are in any doubt about whether you can claim tax relief, speak with your accountant.

The Christmas season is just around the corner, and it’s a great time to strengthen an important area of your business: the relationships you have with your customers.

Here’s a few ways that you could use the festive period to show your customers how much you appreciate them.

Give that Christmas card the personal touch

Christmas cards are a great way to keep in touch with your customers and let them know that you appreciate them, especially if you add a personal touch.

If you’re not sure what to say, here are some prompts for inspiration:

  • Remind them of a project you contributed to and ask how it’s going
  • Mention the next time you’ll be in town and ask if they’d like to meet up
  • Tell them how great it was to work with them
  • Thank them for their business and tell them what it means to you

If you have important clients nearby, perhaps you could even deliver your festive card in person to them - or pick some of your most valued customers to give a Christmas gift to, such as an awesome selection of festive chocolates?

Get out of the office and meet them

Christmas is traditionally a season for office parties and work-related socialising, so it’s a great time to get away from your desk and catch up with your clients.

If you’re not throwing your own festive party, keep an eye out for invitations to any shindigs being held by your clients and customers - it’s a great way to get in some networking, especially if you find that you struggle to network through the rest of the year. Check out our Christmas party networking tips for some do’s and dont’s.

Actually seeing your clients in person and getting some valuable face-to-face time with them in an informal setting is a great way to build rapport and improve your relationship with them. And, of course, there’s also the chance that you’ll meet new people to network with who may end up potentially becoming clients of yours in the future.

Give some valuable tips or advice

At Christmas, people want to feel special and valued - and that goes for your customers too. So what better way to do that than actually offering them some useful information?

For example, if you have a newsletter that talks about all the things that your business has been getting up to, consider adding a section that provides useful advice or tips that your customers would actually find beneficial. A caterer, for example, may include some seasonal recipes in their newsletter, or a web designer may link to some great free stock images that clients could use in Christmas promotions.

Don’t be intimidated by the idea of giving away your expertise for free - if you’re providing great quality, important information, it can build credibility as well as strengthening your reputation as an expert among your customers.

Offer a seasonal special

If you don’t have the budget to send gifts to your customers, you could also consider introducing a special offer or discount for them instead that rewards their loyalty. Offering them a percentage discount on their next purchase from you or a multi-buy discount may seem like you’re taking a hit to your bottom line, but it could be worth it - especially if it encourages them to use your business again in the future. As a bonus, you could extend the discount for a normally quiet period, hopefully boosting your cash flow.

Alternatively, think about teaming up with another business to offer reciprocal discounts as part of a special festive offer. For example, if you run a PR and marketing business, could you join forces with an SEO agency to provide discounts to each others’ clients over the Christmas period and beyond? Your customers will always appreciate it when you provide value to them, so think about what kind of services or products they would appreciate that complement your own.

You may also consider introducing some kind of loyalty card or referral scheme that provides your regular customers with a bespoke discount - which you could highlight in the Christmas card that you send them.

Remember your customers are the lifeblood of your business. Make them feel special this Christmas and you’ll foster better relationships with them that may help your business thrive in the long run.

If you didn’t already know, National Freelancers Day is fast approaching and we’re getting very excited about it here at FreeAgent Towers.

It’s one of the biggest annual events in the freelance calendar and is designed to celebrate the work of independent professionals across the country. Run by IPSE (the association of Independent Professionals and the Self Employed), it’s a great chance for self-employed people across the UK to come together to talk about their experiences of freelancing and suggest ways to make the industry better.

It’s also an initiative we’ve celebrated in recent years here in Edinburgh, although never in an official capacity - as there’s not really been an official Scottish NFD event.

We’ll that’s all about to change. This year, for the first time, National Freelancers Day is expanding from its London roots and we are the main sponsor for its first-ever set-up in Scotland.

We’ll be co-hosting the official Scottish National Freelancers’ Day event up here in Edinburgh on November 19th in the spacious surroundings of the DWF Offices in Fountainbridge. We’ll have a video link to the flagship NFD session in London during the evening, which means attendees in Edinburgh will be able to watch the discussion between journalist Declan Curry, Toby Perkins MP, Nick Boles MP, radio presenter Nick Ferrari, and business expert Emma Jones.

The discussion will focus on how to secure the UK’s future as the world’s most advanced innovation-driven economy, as well as taking a look at various issues that independent professionals face, including the problem of late payment and how to best support the growing number of women and young people going into freelancing. Edinburgh attendees will also be able to pose questions live to the panel in London through the video link.

Our CEO Ed will also be on-hand to offer his own insights about the freelance sector. And if that’s not enough, there’ll also be a special announcement about the winner of IPSE’s 15-for-15 competition during the night. After a lengthy search for the best freelancers in the UK, 15 people have been shortlisted for this prize; which we’re not only sponsoring but our business development director Kevin is also helping to judge (although he won’t give us any of the inside scoop, so we’re very excited to find out who has won!).

We’re really looking forward to hosting NFD here in Scotland and we hope that it’ll be a great chance for Scottish freelancers to come and share an evening with other awesome self-employed people and talk business. So if it sounds like something you’re interested in, why not sign up and join us in Edinburgh next month? http://www.nationalfreelancersday.com/booknow/nfd-edinburgh

For more information about the panel discussion and the flagship event in London, visit the official NFD website - http://www.nationalfreelancersday.com/the-event

In addition to Edinburgh and London, there will also be a further NFD event in Manchester. Full booking details for all three events can be found here: http://www.nationalfreelancersday.com/venues

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