In our regular Q&A series, Croner Taxwise tax adviser, Amaira Badat, explores the tax implications of leaving a gift to an employee before passing away, could it be deemed as a voluntary receipt?
Q. My client and her husband have used the services of a self employed cleaner for many years, and he has become more of a friend as time passed. Towards the end of my client’s husband’s life, the cleaner provided support and comfort to them both. The husband intended to leave him a small bequest, but was unable to do the necessary paperwork before he passed away. Now that my client is downsizing, she no longer needs his services. But she wants to honour her late husband’s wishes and give him a small cash gift. Will this be taxable for the cleaner?
A. The cleaner will need to decide whether this is a receipt from his trade as a cleaner or a private gift. HMRC has some guidance about the principles at: Business Income Manual (BIM41800) Specific receipts: voluntary receipts: contents.
To start, it is not necessarily the character in the payer’s hand that determines the treatment. Even though this is intended as a gift, the cleaner will still need to consider whether:
- This is a receipt off his trade.
- If it is a trading receipt, whether it is revenue or capital.
He could argue that this was not a trading receipt because it was either:
- A gift between personal friends and not linked to his role, or
- If it was linked to the role, it was a consolation for the loss of his role.
If he feels this is purely a gift, then it is not taxable.
HMRC has provided a list of factors at BIM41805, determined from case law which they consider all need to be met for a payment following a loss of a business connection not to be taxable:
- it is clear that the recipient had no legal right whatsoever to the compensation or to anything that it is intended to replace.
- the payment cannot on any view be regarded as additional payment for past services, though it may be made by way of recognition of past services and consolation for the termination of a personal business connection.
- it is made after the business relationship has ceased and there is no likelihood of its being renewed.
- it was unexpected in the sense that it was not sought and that, when the business relationship was entered into, there was nothing to suggest that it would be discontinued after a period and that compensation would be paid on termination.
It seems that he meets of all of these, and therefore it may not be taxable. If he cannot meet these conditions, then he would need to consider whether these receipts are being given to him:
- to use in his business, or
- as consideration for past, present or future services.
See BIM41810 for HMRC’s commentary on the indicators they will take into account.
If he, or HMRC, determine that it was one of the above, it would be taxable as a trading receipt and including in his profit and loss for his cleaning business.
There is also a useful breakdown of some cases in this area on Croner-I (available to subscribers only) at: 222-400 Gifts and voluntary receipts.