Emily Coltman FCA, Chief Accountant to FreeAgent – which provides the UK’s market-leading online accounting system for freelancers and micro businesses – gives her tips on what tax and VAT implications there would be on the presents that make up this famous festive menagerie.
All those birds
There’s a multitude of avian gifts in play here, so let’s look at a few of them:
The partridge in a pear tree is what HMRC calls a “mixed supply” for VAT, because it’s goods with different VAT rates supplied together. That means the pear tree is zero-rated for VAT, while the partridge, as an ornamental bird, would be standard-rated (although if it was going to be eaten as a game bird, then it would have been zero-rated).
Likewise the turtle doves would likely be an ornamental bird and standard-rated for VAT, as would the seven swans a-swimming (and it’s illegal to trap and kill swans in the UK for food, so they can’t be game birds).
As for the 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 say 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.
If you used the four calling birds for business purposes – for example like canaries that miners used to check the air was safe to breathe – these would count as working animals, like a guard dog or farm cat, and they would go into the books as assets of the business, and the cost of their food and care would be tax-deductible.
For the six geese a-laying, 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. HMRC provides a list of goose 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.”
Therefore, as they’re “a-laying”, these geese would presumably be one of these breeds and therefore zero-rated for VAT.
Workers and professionals
There are also some unique and interesting jobs being done in some of the 12 days of gifts. We’ll look at some of these in turn.
The eight maids a-milking would need to live on a farm in order to be able to do their work properly; because in order to do the morning milking they’d have to get up very early, and so it wouldn’t be practical for them to commute. So this means that the farmer can provide them with living accommodation free of tax and National Insurance.
As they’re “a-milking” this also suggests they also have dairy cows with them, so the farmer can account for these using the herd basis. That means the cows are treated as an asset of the farm rather than stock – although this treatment is only available for dairy cows and not for cattle raised for meat.
If any of the nine ladies dancing were offering dance lessons as a side business, would they have to register for VAT? Well, dancing classes are exempt from VAT as education, provided they’re supplied by what HMRC would consider an “eligible body”, (such as a school) – but as freelance teachers don’t really count as “eligible bodies” their supply of dancing classes would be standard-rated.
That means they would have to register for VAT once sales of dancing classes went over the annual limit, which is currently £81,000.
Although they may just consider it as a paying hobby, if any of the 11 pipers piping earned regular money from their music, HMRC would regard them as trading as a piper – which means they would have to register as a sole trader and keep track of their earnings and costs, file a tax return each year and pay tax and National Insurance on the profit from their piping.
The 12 drummers drumming would have to buy their costumes to perform in, which might include be a kilt, jacket and plaid for a drummer in a pipe band, or a suit for a jazz band drummer, and so on. They will then be able to claim tax relief on the cost of that costume, because HMRC says that a costume for a performer is tax-deductible.
Those golden rings
A married couple, or a 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 – even if they are both in “true love”. 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 – so if the five gold rings are adorned with precious jewels, for example, they may well be expensive enough to be liable for CGT.
Even special Christmas gifts can contain tax pitfalls – so the “true love” in the story may need to do some research before buying and sending them!
Emily Coltman FCA is Chief Accountant to FreeAgent, which provides an award-winning online accounting system designed to meet the needs of small businesses and freelancers. Try it for free at www.freeagent.com
Image: 12 days of christmas via Shutterstock
