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September Question and Answer Corner

Newsletter issue - September 07.

Q. One of my employees has died suddenly and I want to make a lump-sum payment to his family. Will this be tax deductible for my company and will the family be taxed on the payment?

A. Any lump sum payment made in connection with the death of a serving employee is tax free for the recipient, as long as that payment does not constitute an un-approved retirement benefit scheme. The payment should also be tax deductible for your company as it is made in connection with the termination of the employment of one of your staff, (unfortunately in this case by death).

Q. My bank paid me some compensation due to their mismanagement of my account. Is it taxable?

A. It depends whether the compensation relates to your business or private bank account. A payment in connection with your private account is a personal matter and is not taxable. If the payment was made in connection with your business bank account, and as a result of a claim being made to the bank, then it is a trading receipt and is taxable as part of your business. If the compensation payment was made without being asked for, (very unlikely from a bank) it may not be a trade receipt, and thus not be taxable unless was paid to replace an asset that was lost or destroyed.

Q. I'm on the flat rate VAT scheme for small businesses and have recently paid over £2,000 for membership of trade organisation. Can I claim the VAT back on that fee as a capital asset?

A. Under the flat rate VAT scheme you are not permitted to reclaim VAT paid on any purchase, unless it is a capital asset costing £2,000 or more. The capital asset acquired must be a physical good, not a service. So the payment to join the trade organisation does not qualify as a capital asset for the flat rate VAT scheme, and you can't reclaim the VAT.