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Santa’s tax effective Christmas

Readers take note! Santa’s not the only one who needs to pay attention to a changing tax world...

So here we are at Christmas Eve 2019. After many years of centralised operations at the North Pole, we have learned that Santa has overhauled his business model. He has created a UK fulfilment centre to allow for more efficient delivery times across Europe.

It’s all hands on deck to ensure the final deliveries go without a hitch. Some key elves have been seconded from the North Pole to the UK to keep things running smoothly. Furthermore, an army of Santa’s little helpers have descended on the distribution hub for the winter. Santa is really embracing the gig economy!

Keeping tax costs down

  • For those flying off to make international deliveries, careful records are kept to substantiate tax relief claims for travel and subsistence under s337 and s338 ITEPA 2003, while helpers making deliveries within the UK (often made by cars and motorbikes these days rather than the traditional sleighs) are keeping track of their business miles to claim their available tax relief at 45p/mile for the first 10,000 miles and 10p/mile thereafter under s231 ITEPA 2003.
  • The elves seconded from the North Pole are aware of the relatively generous tax reliefs available to expats in the UK and are keeping careful track of their non-UK workdays and their travel and subsistence expenditure while at their temporary workplace in order to support the relevant tax relief claims under sections 26,337 and 338 ITEPA 2003.
  • To assist the helpers and seconded elves who have had to move for this job, Santa has arranged some relocation assistance such as shipping and temporary accommodation (sticking to qualifying costs under £8,000 of course, to take advantage of relief available under s271 ITEPA 2003).
  • The seconded elves’ travel to the UK is covered by Santa tax-free, and Santa has even agreed to fly the North Pole elves’ families over for Christmas day. Lucky for them, these trips can be considered tax-free under sections 373 and 374 ITEPA 2003.
Santa has even agreed to fly the North Pole elves’ families over for Christmas day. Lucky for them, these trips can be considered tax-free

Fulfilment of Santa’s corporate tax obligations

The fulfilment centre brings with it a few corporate tax questions, though. Santa’s operations are undeniably large, so the full transfer pricing legislation will apply, and an arm’s length profit must be reported in the UK, even though all gifts are being provided free of charge to children who have been good.

One of Santa’s naughty goblins (who likes to cause mischief for the elves) has suggested that the fulfilment centre won’t enter into contracts, and will only be there for a very short period over Christmas, so will not create a UK permanent establishment (PE). Unfortunately, this ignores the UK’s Diverted Profits Tax – where arrangements are structured to avoid a PE, then a tax charge is likely to arise.  And those key elves sound as if they could be carrying out key people (or elvish) functions in the UK, making a tax bill even more likely!

We’d recommend that Santa and his elves ignore the goblin, and get their transfer pricing Master File in order as soon as they can – and don’t forget to ensure that the organisation’s tax strategy is clearly available on a UK website before 31 December!

Compliance woes ahead for Santa?

As the deliveries go off without a hitch, Santa has a nagging sense that things might change next year when new rules come into force. Although to an outsider it might look like the warehouse is staffed with regular employees, the majority are engaged in a variety of ways – a lot of the delivery workers are self-employed or have their own personal service companies (PSCs), and it’s emerged that one of the North Pole elves also has her own PSC at home.

The availability of a flexible workforce has helped meet demand for Santa’s Christmas deliveries while also keeping down costs of employing a traditional workforce (employer National Insurance, pension contributions, not to mention salary costs during quieter periods) but from April 2020, if the worker is deemed to be an ’employee’ for tax purposes, the obligation to withhold PAYE and National Insurance will move from the PSC to Santa’s company. Additionally, an assessment of the status of whether each and every worker would be considered an ’employee’ for tax purposes will need to be carried out and provided to them.

Santa thinks about it for a few minutes and reasons that for self-employed workers as well as the non-UK based PSC, the obligation to assess worker status and operate PAYE/NI if required already lies with his company, so no change there. There is also no reason that he can’t continue to use the services of individuals who are genuinely not considered ’employed’ for tax purposes without including them on the payroll, however, processes will need to be put in place to ensure that the new rules are applied properly. That’s settled, Santa thinks – that can be a job for January!

On the Santa’s Little Helpers’ minds, there is also the moving feast of Brexit to consider. Many are debating over whether they’ll return next year, and they worry about the potential impact of Brexit on social security agreements currently in place covering the European Economic Area. There have been indications that the UK government will continue to honour existing A1 certificates, but the new year could bring a deal which brings more certainty well in advance of the next Christmas season.

In the meantime, there are deliveries to be made and celebrations to be had!

Have a great Christmas!