A good accountant matters more than ever

If you seek out the right support early on and put in place the best structure, you’ll be in a better place in the long term. This is easy to say after the event, but because you never did it, doesn’t mean to say you can’t do it now.

At Elsby, we’ve met plenty of clients who were honest in admitting it was time to move on from their existing accountants. Unfortunately, some decide to stick with the status quo for reasons we understand.

‘Moving on’ isn’t always easy, perhaps the existing accountant is a family friend or someone that supported them in the early days. As the business grows it becomes clearer that their accountant doesn’t always have the right level of expertise, or they may be too busy to give them the time because they’re a team of one.

Staying with an accountant out of displaced loyalty is an honourable sentiment but if you are not getting the best service for your business, your accountants won’t be the ones who suffer.

At Elsby, we believe there is more to accounting than a set of books, non-compliance elements such as business strategy, growth, funding, and wider business development advice are just as important. Your accountant should be an important resource for this type of expertise, giving you the time and freedom to work on the business, rather than in it.

With many subject experts within the business we’re well placed to cater for the growing needs of SMEs. It’s true that some small business owners are unaware of the tax reliefs they could be claiming to reduce their tax bills, we like to think outside of the box, and work hard to understand the  business, claiming any available tax reliefs.

It’s something of a myth that changing accountants is difficult, it can be simple and straightforward. We provide a free meeting (in person or virtual) where prospective clients can bring in their accounts or tax returns, we can probably even make some suggestions there and then. For those choosing to change, we’ll e-mail the existing accountants requesting a few items and some forms to complete. It’s straightforward and quick and means the business will be in a better place moving forward.

It never hurts to get a second opinion and a conversation cost nothing. If you’re reading this and nodding, we hope you’ll take the plunge and invite Elsby to be a part of your future and provide a level of advice and expertise which can help you reach your business goals.

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This is an abridged version of the Elsby article featured in the Business Times A good accountant matters more than ever – Business Times (business-times.co.uk)

Separation, divorce & Capital Gains Tax

Events of the last couple of years have put considerable pressure on many relationships, resulting in an increase in separation and divorce amongst married couples. The tax consequences of separation are often overlooked.

Most separations result in a transfer of assets between the married couple. Typically, these assets would be a family home, buy-to-let properties, business assets or investments. For the wealthy, there can be significant exchanges of capital sums which are likely to have increased in value over the course of the marriage.

In most circumstances, there is no capital gains tax liability when assets are transferred between married or civil partnership couples. In effect, there is a no gain, no loss position. This being the case, it seems logical that there is no capital gains tax between divorcing couples if they transfer the assets before the divorce is formalised. Unfortunately, this is a common misconception.

Many couples appreciate that they must pay some capital gains tax on the transfer of assets after the partnership has been legally dissolved. They might not however realise that there could be a capital gains charge on separation before the formal divorce.

Where a couple have lived together at any point in the tax year in which assets have been transferred, the married couple do not have to pay capital gains tax. However, if a couple have separated in the previous tax year, then capital gains tax will be owing on the transfer of assets.

This can have an important tactical, timing impact on separation and divorce agreements and the transfer of assets. It also suggests that separating is best done on the 6th of April (earlier in the tax year), rather than the 31st of March (at the end).

There are potential issues for the main home around gifting or selling and exemptions of principal private residence which need to be assessed individually. A spouse moving out of the family home may lose a portion of their principal private residence relief without realising. In short, there are many considerations which have a bearing on the financial outcome.

A tip to consider when supporting individuals is ‘Can assets be transferred in the tax year of separation or within 9 months of separation?’

At Elsby we review the capital gains implications of any transfers of assets, additionally considering if there are any mitigations for the tax amounts due. This can maximise the pool of funds available to be shared between the parties. By undertaking this, both parties are jointly aware of the tax implications, allowing for communications to be improved when negotiating the financial settlement.  After all this, we then support individuals with their reporting requirements to HRMC once assets have been transferred.

Separation is never easy, but steps can be taken to ensure couples don’t make an awful year even worse.

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Do you understand your Directors Loan Account?

Director’s loan accounts (DLAs) have had some negative press in recent weeks with concerns regarding the potential misuse of bounce back loans. DLAs should be relatively straightforward, but they can quickly become more complex so it’s important they’re dealt with correctly.

In its simplest form, the DLA records all transactions between the company and the director. The amount owed will be to or from the director and if there are multiple directors in the business, each should have a separate director’s loan account. Each DLA records the net position between the company and the director, should always be up to date, and backed up by minutes of company meetings – a compulsory requirement if the loan is over £10,000.

Many directors use their loan account as a short-term, low-cost finance source, often to cover such things as school fees or home repairs. There are no restrictions on how this money is spent, however they should only be used as a last resort.

On the flip side, directors can lend money to their company. This might be to address cash flow or to help finance expansion of the business where more traditional methods of finance have provided difficult to source. The legal requirements and potential penalties from a director’s perspective and the company are very different.

Funds owed to the company by a director are classed as an asset and consequently, if the company were to be liquidated or put into administration, those winding up the company would pursue directors for outstanding loans and require the monies to be repaid back to the company.

Any DLA with a deficit should be cleared within nine months and one day of the company’s year-end, typically through salary, dividends, or even through an expense claim, though this way is a little more complex and could leave the company open to a tax enquiry.

While there may be a temptation to repay a DLA deficit one day before the company’s year-end and withdraw funds again one day into the new financial year, this is not allowed. Rules have been introduced to prevent loans from being re-borrowed within 30 days of the initial repayment.

If a DLA deficit is not addressed within nine months and one day after the company year-end, there are potential tax repercussions for directors in a personal capacity and the company. HMRC can apply a tax charge known as an s455 of 33.75% of the outstanding balance.  The debt on a DLA might also be treated as a benefit in kind depending on various criteria, with the possibility of the Director having to declare this on their self-assessment tax return.

With the impending introduction of the extra 1.25% National Insurance Increase for Social Care, now is a good time to consider clearing your DLA – as it becomes more expensive after 5th April 2022.

While the idea behind director’s loan accounts is straightforward, it’s an area many Directors have little knowledge of. HMRC are keen to stop the potential tax abuse of DLAs, however there are many scenarios that are exempt from the s455 tax charge. Educating Directors is a good thing, but there’s no substitute for good advice.

Elsby can provide tax planning in respect of timing for a clearing of a DLA to minimise the overall tax liability and marginal rate of tax. If you need help with remuneration planning or advice before utilising a Directors Loan Account, Elsby can help.

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This is an abridged version of the Elsby article featured in the Business Times Stick to the rules or face the repercussions – Business Times (business-times.co.uk)

Tax efficient electric vehicle ownership

On the face of it, owning an electric vehicle can look like a costly proposition, but with a little bit of planning, costs can be reduced to such an extent that it becomes quite compelling.

As ‘EVs’ become ever more accessible, the Government are encouraging the switch by making it rather attractive from a tax position – particularly so if you work for a company that is prepared to help you navigate to the most tax efficient solution.

Company cars are taxed through a benefit in kind rate (BIK). In 2019 the Government announced a 0% BIK rate for EVs, effective for the 20/21 tax year, rising to 1% in 21/22 and 2% in 22/23. This sounds low, but it’s only when you compare it against a petrol or diesel sibling that you realise how much of a difference this can make. A diesel or petrol engine car can have a BIK rate as high as 37%, with 25% seemingly around the average for a ‘normal’ family saloon. What does this mean? On a £30,000 list price for a new car, the taxable benefit on the EV would work out at £600 (in 2022/23) versus a 25% BIK rate which would have a taxable benefit of £7,500 per annum. Quite a difference!

The BIK rate only tells you half the story. If you’re fortunate to work for a company that is prepared to assist you, or, if you have your own company, there are many ways to reduce the cost of ownership of your EV.

Owning or leasing a car through the business can further reduce the tax burden. There are opportunities to reduce personal tax, and National Insurance through salary sacrifice. The business can reclaim VAT and qualify for relief against company profits through capital allowances, with any finance costs also deductible against company profits.

If you’re a Director of the business, there are options in how you’re paid, and the BIK can fall within your tax-free personal allowances. There are also opportunities to expense some of the initial and day to day costs such as home charging points, insurance, and servicing and repairs through the company. If you’re a shareholder and take your remuneration via dividends, the tax savings are even more attractive.

In short there are many considerations which can make for a cost-effective ownership proposition. If you’re thinking of making the change and would like to discuss the options available to you, we would be delighted to help.

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This is an abridged version of the Elsby article featured in the Business Times Tax incentives spark renewed interest in electric vehicle switch – Business Times (business-times.co.uk)

Temporary reduced rate of VAT set to change

What is changing?

Whilst there will be a change to the temporary reduced rate from the end of this month, it is not due to cease altogether. In March 2021, the Chancellor confirmed that the temporary reduced rate for catering, holiday accommodation and admissions to attractions would be extended by a further year to the end of March 2022 – however this will be in two tranches:

  • Extend the period covered by the reduced rate of VAT at 5% until 30th September 2021.
  • Increase the temporary reduced rate to 12.5% from 1st October 2021 to 31st March 2022.
  • Supplies are then due to revert to the standard rate of 20% from 1st April 2022.

What do I need to do now?

If this affects you, you will need to prepare for the increase in rate from 5% to 12.5%. A supply of holiday accommodation is a single supply of services; the basic tax point is completion of the service, but this can be overridden by the creation of an actual tax point.

An actual tax point is created by a pre-payment, advance issue of a VAT invoice, or issue of a VAT invoice after, but within 14 days of the basic tax point.

So, where you take a booking either with a payment of a deposit of payment in full between now and 30th September (inclusive) this creates an actual tax point (in the case of a deposit, the tax point is created only to the value of that payment) even if the stay is due to take place on or after 1st October 2021.

Tip

You can benefit from the 5% rate for all payments received before 1st October, even if the holiday takes place after the rate has increased.

SEMLEP’S Recovery & Resilience Grant scheme opens

What is the Recovery & Resilience Grant Scheme?

The R&R scheme offers matched funding to businesses to invest in new technologies, plant equipment, or machinery to help businesses create employment opportunities.

The minimum grant is £5,000 and the maximum grant available is £50,000.

Eligibility

Applicants must meet the following criteria:

  • Be an SME (employ less than 250 people and your turnover is less than EUR 50m or annual balance sheet less than EUR 43m).
  • Be a trading enterprise (and have at least 1 years’ worth of accounts).
  • Be registered in the UK and have a base in the South East Midlands area.
  • Be ready to invest or expand in the local area.
  • Must not have been a company ‘in difficulty’ on 31 December 2019.
  • Must not have already received a Recovery and Resilience grant.
  • Must not be a repeat application, including from a linked company.

Tip

The SEMLEP grant is subject to available funds, so if you do meet the criteria and would like to apply, do so as soon as you can.

Carl Elsby’s Budget Blog – The view from the ‘boss’

For as long as I can remember, I have written a kind of alternative budget blog – not full of facts and figures, like all the other accountants, but a bit outspoken and opinionated. Just once a year.

This year, however, I have had an unforeseen problem – a serious one which stopped me in my tracks. My two sons have become way more knowledgeable than me. Whilst that has made me really proud, I found when I sat down to write this, that it made me very hesitant. I didn’t want to look a fool to them and I was being a bit cautious.

As it happens, there’s virtually nothing to say about the tax side of things, so what I decided was that I’d ask my youngest son to give my long suffering readers some valuable insights on the economic aspects of the budget. By way of an introduction, Luc works for the Treasury in a department reporting to Rishi Sunak that advises on the long term effect of fiscal policy. Luc actually wrote a whole section of the Budget Review (Appendix A of the document below, if you’re interested).

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1028814/Budget_AB2021_Web_Accessible.pdf

Let me get my bit out of the way first – tax things that might affect you.

  • The main news is no real changes to anything, of any significance. There’s only tiny things, which I don’t think are worth mentioning – you will have read these.
  • The Minimum wage goes up to £9.50 per hour
  • Some fairly insignificant business rates relief for retail, hospitality and leisure sectors which just doesn’t cut it, I’m afraid – too small to help sectors suffering real problems.
  • Increased R&D investment along with a promise to modernise the system – my interpretation of that is that small businesses will get less and large businesses more – I think the Chancellor thinks small businesses are serial tax avoiders and R&D claims are part of that.
  • The main points to mention are old news – corporation tax rates go up to 25% in April 2023 which is a huge change. Also NIC for employees and employers, together with dividend tax, will increase by 1.25% from April 2022 to fund social care. More later.

Now on to the interesting bit – some economic insights from inside the system…

So Luc, give me an oversight of the Government’s thinking when it comes to the Budget

“Right, Dad, this Budget is basically a spending review and there’s 3 main factors that would determine your spending policy:

  • Providing goods to the public to meet public service backlogs (eg healthcare & education)
  • There’s a political angle, (eg levelling up, or net zero, where Boris wants to spend loads)
  • The macroeconomic angle where the government wants to support the economic recovery. It has traditionally done this by manipulating interest rates (known as monetary policy), but interest rates have been so low that there is no room to cut them any further. The other option is to spend more to inject money into the economy, but the government is constrained by its level of debt and the possibility of interest rates and inflation rising, which would make this debt much more expensive

Essentially, the Gov’t have realised that there is a need to spend more money on public services. Broadly, this realisation has come from two things: (i) the population is getting older and so requires a lot more spending on health, social care and pensions, and (ii) the austerity that came after the financial crisis reduced funding for public services, rather than increasing it in the face of these ageing pressures. The former is a big pressure for the public finances. It is not a new problem though, but has been funded through long-term reductions in spending on defence and overseas aid over time that have avoided the need to raise taxes. There isn’t much room to cut these any further and so something has to give – either you reduce state provision of goods and services (privatisation), or you find new ways of funding these things (the tax increases announced up to this Budget).

Overall, this Chancellor recognises the need to increase spending to combat pressures relating to covid, ageing, net-zero, and to support the PM’s levelling up agenda. He also recognises that this will support the economy over the next 2-3 years so is happy to commit to this spending without raising additional taxes in the short-run (i.e., funding through borrowing). But he thinks we must balance the books in the long-term, so has made it one of his rules to fund all additional spending through taxes from 2024-25 onwards and reduce public debt over time. Right now, he’s done that through tax increases, but eventually he wants to achieve higher economic growth to fund this increase in costs, and so wants to be in a position to reduce taxes in the future.”

Now we’re talking, Luc. Tax, that’s what all my clients want to know about. We’ve got a 6% increase in corporation tax in 2023, and NIC rises from 2022. Is there going to be more?

“I’ve no idea, Dad, and I couldn’t tell you if I knew.”

Oh come on, Luc, I did clean you up when you pooed yourself in McDonalds that time many years ago…

“To be honest, I doubt if anyone knows – it will depend on how things go. There’s probably 3 generic factors that determine your tax policy:

  • to pay for spending
  • Wealth Re-distribution
  • To change behaviour (eg carbon taxes, fuel duty)

If you’re looking to achieve the first one (fund spending), you’d have to look at the 3 taxes that contribute the most toward our overall tax take (income tax and NICs, VAT and corporation tax), tweaking anything else isn’t going to raise a huge amount (nowhere near enough to fund the health and social care spending etc). NICs have been increased because it is what’s normally used to fund things like health and social care – i.e., its purpose is that the state helps you insure yourself against old age and ill health (hence the name national insurance), so it works to fund the extra spending in these areas. It has been criticised a bit because it is seen as taking tax off working people and is unpopular as it is the younger working generation paying for services mostly used by the elderly. It’s also less progressive than income tax so hits the lower earners harder. How to extract tax from the population in the fairest way is a big issue in Gov’t and I have no idea where it might go. Lots of advanced countries are in the same position and the IMF tends to favour increasing consumption tax, like VAT, because it is paid by everyone not just workers (but it needs to be managed in a way that doesn’t disproportionately hit the poorest).

Corporation tax in the UK is low internationally, so it could be seen as low hanging fruit – i.e., we can increase it and raise a lot of money and still have a fairly competitive corporation tax rate.”[Me: you’ve taught me a lot today; now I need to educate you a little. As recently as 2007, large companies paid a tax rate of 30%, and small companies 20%. The rate for large companies has dropped to 19%, the same as small companies. In 2023, the rate for all but the very small will be 25% – so large companies are 5% lower than 2007 , but small companies are 6% higher, and the owners are also now paying dividend tax of 8.75%. Can you speak to Rishi about his disdain for small businesses?]

“Dad, you’re starting to rant…….. “

People are talking a lot about Wealth taxes?

“Yes, these taxes are getting a lot of attention but people are yet to find a good design for it. People think these will affect the wealthiest, but they won’t – they will always find ways of hiding wealth and avoiding, because they’re in the best place to move their money around. It would hit middle earners most if its going to raise any decent money, anyone with a house and a pension. “

Make sure that doesn’t happen then, Luc? That’s a lot of our clients, it’ll be very bad for business.

No answer. Okay, let’s talk about interest rates, as I’ve read that lenders are increasing their rates for fixed rate mortgages – interest rates going up will be a disaster, surely?

“Oooh, controversial Dad, not necessarily. For a long time, the central bank (Bank of England) has been given a remit to keep inflation at 2-3% through its interest rate policy, and stability has been achieved with very low interest rates for a long time. But there are 3 main problems:

  • You have an anaemic economy (eg cheap loans keep unproductive, highly indebted businesses afloat, you get inter-generational problems where richer people hoard assets which become too expensive for younger people to buy, and savers can’t get anywhere in society because of the low returns)
  • If institutions cannot get a good return, they will take more risk, which arguably caused the Financial Crisis in 2008 as bankers and financial institutions took on so much risk and gorged themselves on cheap money
  • There’s no wiggle room for the government to respond to crises by adjusting interest rates (which is fairly costless) – when rates are 0.25% there is no scope to reduce interest rates to control the economy. Then in a crisis [Covid] there is little option but to spend money to boost the economy, which increase public debt and will eventually lead to the need to increase taxes.

The last point is important. Reducing interest rates is a low-cost way for a Gov’t to boost the economy. Spending is the alternative, and this carries a high cost.”

So tell me about Debt – the Gov’t has obviously spent a lot during Covid, and continues to do so. Where does the money come from?

“It essentially comes from our own people – the UK population, mainly pension funds and banks who are managing OUR assets. They buy Bonds from the Gov’t and during Covid, these institutions will invest in Gov’t Bonds at very low rates because of the risk profile. There was a time when the interest rate on Gov’t Bonds was NEGATIVE – so institutions were lending money to the Gov’t and paying THEM for the privilege. This was because investments were so volatile, they would rather pay a small interest rate to look after their funds, than risk losing a great deal more.

So debt has risen, but most economists do not see this as problematic as we have low interest rates. Also, all countries are spending and borrowing loads, at cheap rates. This is a very different situation to if you were the only country borrowing and spending – then you would be forced to pay very high interest rates.

This of course might mean that borrowing doesn’t matter, so why should we need to raise taxes? The problem is that a lot of the borrowing the government has done has been funded at varying interest rates rather than fixed rates (through necessity). Similar to a variable tracker or a fixed rate tracker mortgage. This means that when interest rates rise (as many expect them to do soon), the costs of servicing this debt will increase massively and will force the government to pay interest and divert money away from public services like health and education.

As a result, the Chancellor definitely wants to bring debt down in the long run, but doesn’t want to risk increasing taxes and damaging the economy in the short term. After 3 years, he wants to balance ‘Current Spending’ which excludes Investments, and the only additional borrowing would be to fund Investments with long term benefit.”

But what if interest rates rise, which seems to be what is expected?

“Yes, the issue is that public finances are VERY sensitive to interest rate rises. The Gov’t is trying to get ahead of that risk by repairing public finance before it happens.”

So it depends how the economy goes?

“Of course, Dad. It’s interesting to note that just before the Budget, the Gov’t got figures showing that the economy had performed better than expected, and it actually had some funds in the coffers to play with. There was a lot of discussion of whether to bring that into the spending, or save it for a rainy day (e.g. interest rates rising). In the end, the Chancellor decided to take a middle route, spending some to please Boris and saving the rest.

The surplus arose because nobody had any idea at all what would happen with Covid and how the measures would work – the feeling is that the economy held up better than expected.”

What about inflation then? The official figures are around 4% but that just seems ridiculous to me – it feels more like 15%.

“Well, boosting the economy by spending fuels inflation. You’ve also got the problem that Covid is affecting the supply side, which is increasing the pressure on inflation. The Gov’t doesn’t want to contribute to inflationary pressures with its spending which is a factor in deciding where to allocate funds. “

What about the bit you wrote, Luc?

“Dad, I need to go out soon. But just this last question. I wrote Appendix A which is about the re-introduction of fiscal rules. These basically require the Government to operate within certain ratios. Some rules were introduced a while ago, but were abandoned during Covid, and are now being re-introduced, with some modifications, and with some flexibility, given the high levels of uncertainty. The rules are:

  • Net debt as % of GDP to be falling after 3 years
  • Current budget to be balanced after 3 years
  • Public sector investment does not exceed 3% of GDP
  • Welfare costs remain sustainable and within a predetermined cap”

Aha, that last bit sounds a bit more Tory?

“The Gov’t feels that there is a good labour market and there should be less state reliance. The Universal Credit taper is all about the fact that as you increase your working hours, you lose Benefit, of 63p in the £, now reduced to 55p, so in the recipient’s favour.”

When you add tax and NIC to the loss of Benefit, this is still a massive disincentive to work and I know people in that very boat.

“Dad, I need to go out, it’s Sunday night……”

So my massive thanks go to Luc for what I found to be a fascinating insight, and I hope I have done justice to your thoughts. I’m very proud of this young lad, of course, who is only just 2 years into his working life – he’s got a pretty exciting job and he’s doing really well, and having a great time in London at the same time.

So what do we take out of all this?

It seems to me that no matter how hard the Gov’t tries to control inflation, it’s going to go up. I don’t believe the figures, in all honesty. Different department to Luc’s. This will lead to increases in interest rates, so we should prepare for that.

I think that the amount of inflation and interest rate rises we get depends on the economy and how well it does. From all the businesses I see, I can see real energy and optimism – things are buzzing, BUT everyone is finding things unbelievably difficult operationally. Supply issues, price issues, logistical issues, labour issues. It’s incredibly difficult to recruit, and also to keep your own staff. To combat all of these things costs money, and I can see how inflationary that is.

I feel there is so much scope for business growth, but operational issues are holding it back. I believe that labour is the starting point. We need to get solve the labour shortage, otherwise we simply won’t have the resource to grow the economy. If we can do that, and things settle down, I hope that the economy can thrive, and inflation can be held at bay, easing pressures on interest rates and taxes.

From a tax point of view, we have some major increases already planned. There may be more, depending on how the economy fares in the next 2 years.

The Christmas Staff Party & Employee Gifts – What can you claim?

With the Christmas party season upon us for many, we are often asked about what can be claimed.

Christmas Parties – What is exempt?

There is a tax exemption for employee entertaining if the event is all of the following:

  • an annual party or social function, such as a Christmas party or summer barbecue
  • it is open to all employees (or all employees based at one location)
  • the cost does not exceed £150 per head (inclusive of VAT)

The total cost of the party is the whole cost of the event, from the start to the very end. It therefore includes food, drink, entertainment, taxis home, overnight accommodation, etc.

The limit of £150 per head applies to all those attending the function, not just employees. So, if employees are allowed to bring guests, the total cost should be divided by the total number of employees and guests.

A taxable benefit in kind will arise if either the limit is exceeded, or the function is not open to all staff or it is not an annual function.

TIP: Please be aware that the £150 per head limit is an exemption not an allowance – go just a penny over the £150 and the full cost becomes taxable.

  1. HMRC have confirmed that Virtual Christmas Parties are eligible for the annual function exemption.

Gifts to Employees

Christmas presents paid in cash to staff will be taxable as earnings in the normal way (subject to tax and national insurance). The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher.

Vouchers exchangeable for goods and services only (non-cash vouchers) are also taxable and must be reported on the employee’s form P11D. Class 1 national insurance will normally need to be deducted through the payroll.

Make sure you tell the person who prepares the payroll, so they can report the correct figures to HMRC.

TIP: You may wish to give employees a seasonal present, such as a turkey, a bottle of wine, or a box of chocolates. Provided the cost of the gift is ‘trivial’ – typically less than £50 ahead – the gift will usually not be taxable.

If the gift exceeds this value, it will be taxable and it will need to be reported to HMRC on either a form P11D or through a PAYE Settlement Agreement (PSA)

Please note: 3rd parties

Employees may receive gifts from third parties as a result of their employment. As long as the gift does not exceed £250 in cost, it should not be taxable for the employee.