The mince pies are out and Christmas tunes are on the radio, which means that it’ll soon be time to start singing about gold rings and partridges in fruit trees, but when it's self assessment season, can advisers ever really relax, wonders FreeAgent chief accountant Emily Coltman.
When you hear the classic song “The Twelve Days of Christmas”, do you ever stop to think about the tax implications of all of those gifts that the author’s ‘true love’ sends?
If you were preparing the minstrel's tax returns, what income tax and VAT would be applicable on the gifts that make up this famous festive menagerie?
A partridge in a pear tree This is what HMRC call a “mixed supply” for VAT, because it’s goods with different VAT rates supplied together. The pear tree is zero-rated for VAT, while the partridge, as an ornamental bird, would be standard-rated. If the partridge were going to be eaten as a game bird, then it would have been zero-rated - but we’re assuming that this partridge won’t be eaten! So the supplier of the “partridge in a pear tree” would have to work out how much of the total sale price is for the pear tree and how much for the partridge, and add VAT at 20% to the partridge’s price only.
Two turtle doves This makes me think of tax exemptions for couples. A married couple, or a same-sex couple in a registered civil partnership, can give each other large and expensive gifts such as a painting, or a piece of jewellery, and there won’t be any need to pay capital gains tax, because transfers between spouses or civil partners are exempt. But if the couple aren’t married, or aren’t in a registered civil partnership, then there could be a liability to capital gains tax. For most personal items this will only kick in if the asset that’s given is worth over £6,000, and some assets, such as cars, are exempt.
Three French hens When goods of any kind are brought in from the EU and bought by a business that’s registered for UK VAT, the business has to work out and account for the VAT they would have paid if the item had been bought in the UK. Where it gets complicated is that hens are standard-rated for VAT if they’re ornamental birds, but zero-rated if they’re kept for their eggs or their meat. HMRC says that “most breeds of chicken are zero-rated”, because it’s more usual to keep hens for their eggs or meat than as ornamental birds. So I would say that these French hens would be zero-rated for VAT and so there wouldn’t be anything extra to add to box 2 or 4 of the UK VAT return.
Four calling birds For this I’ve thought of the canaries that used to be taken down mines to see if the air was safe for miners to breathe. Would the cost of feeding and veterinary care for these canaries be tax-deductible, or indeed the cost of replacing them? Because these would count as working animals, like a guard dog or farm cat, they would go into the books as assets of the mining business, and the cost of food and care would be tax-deductible.
Five gold rings If you’re buying an antique gold ring or other piece of second-hand jewellery, how would the seller work out VAT? Most sellers of second-hand goods can use the VAT margin scheme, which means that instead of having to work out the VAT on the sale price and take off the VAT on the purchase price, they can just work out and pay VAT on the profit on the sale. But goods made from precious metals and precious stones are specifically excluded from this - so the jeweller would have to work out their VAT as normal, adding up the VAT on the sale and taking off the VAT on the cost.
Six geese a-laying HMRC goes into a serious level of detail on this. The basic rule of thumb is that poultry kept for their meat or their eggs would be zero-rated for VAT, whereas ornamental birds would be standard-rated. For geese, HMRC provide a list of the breeds that are usually kept for laying or meat and say that in order to be zero-rated, the geese would have to be one of the following breeds; “Brecon Buff, Chinese Commercial, Embdem, Roman, Toulouse and derivatives and crossbreeds of these.” Otherwise they would be standard-rated for VAT. Because these are “geese a-laying”, I’m going to assume that they would be one of the qualifying breeds and be zero-rated!
Seven swans a-swimming Roast swan used to be a popular delicacy in the UK. Nowadays, though, all swans belong either to the Queen, the Dyers’ Company or the Vintners’ Company, and it’s illegal to trap and kill them for food. That means that, because they’re no longer a species generally eaten in the UK, the supply of swans would be standard-rated for VAT.
Eight maids a-milking Milkmaids need to live on the farm in order to be able to do their work properly; in order to do the morning milking they have to get up very early, and so it wouldn’t be practical or possible for them to commute. That means that the farmer can provide the milkmaids with living accommodation free of tax and National Insurance. The cows are dairy cows, so the farmer can account for them using the herd basis. That means that the cows are treated as an asset of the farm rather than stock, so there’ll be no tax to pay when the cows are sold, but also no tax relief on buying new cows. This treatment is only available for dairy cows and not for beef cows.
Nine drummers drumming A drummer would have to buy his or her costume to perform in. That might be a kilt, jacket and plaid for a drummer in a pipe band, or a suit for a jazz band drummer, and so on. He or she can then claim tax relief on the cost of that costume, because a costume for a performer is tax-deductible. A jazz band drummer might buy exactly the same dinner suit as an accountant who wears the suit for business dinners - but the accountant can’t claim tax relief on the cost of the suit because in his or her case it doesn’t count as a costume or qualify for any other exemptions.
Ten pipers piping A friend of mine from university is a geological engineer by profession, but he’s also an excellent Highland piper, much in demand to play at weddings, Burns Suppers and New Year’s Eve parties. Because he does this regularly and earns money from it, HMRC would regard him as trading as a piper, so he’s had to register as a sole trader and keep track of his earnings and costs, file a tax return each year and pay tax and National Insurance on the profit from his piping. If you have a paying hobby as well as working, could your hobby count as a business and might you have to pay tax on its profits?
Eleven ladies dancing The ladies would have had to learn to dance somewhere, but would their teacher have had to register for VAT? Dancing classes are exempt from VAT as education, provided they’re supplied by what HMRC would consider an “eligible body”, such as a school. Freelance teachers don’t count as “eligible bodies”, unless they’re teaching English as a foreign language, so the supply of dancing classes by a private tutor would be standard-rated. So if these ladies have been taught to dance by a freelance teacher, he or she would have had to register for VAT once sales of dancing classes went over the annual limit, which is £77,000 at the moment.
Twelve lords a-leaping What would be the tax implications if these lords a-leapt out of the country? It depends why they’re a-leaping out and for how long. For example, to leave the UK on a full-time employment contract could mean that you’re no longer UK resident from the day you leave, but you may not lose these statuses so quickly if you retire abroad. Not being UK resident means that you would only pay UK tax on any income you earned in the UK, such as rent from a property here. UK residents pay UK tax on their worldwide income. HMRC is changing the tax rules from April 2013 so if you are planning to leave the UK, check to make sure what your tax status will be.
So even special Christmas gifts can contain tax pitfalls!
Emily Coltman ACA is Chief Accountant to FreeAgent, an award-winning online accounting system designed to meet the needs of small businesses and freelancers.