GAAP, Goodwill and Gifts
GAAP
An acronym standing for Generally Accepted Accounting Practice. Accounts (see A is for…) must be prepared under acceptable accounting standards, HM Revenue & Customs require that your company or your self-employed accounts are prepared in accordance with either UK GAAP or International GAAP. For small businesses UK GAAP will be the accounting standards that are used when your accountant prepares your accounts.
Goodwill
Goodwill is a business asset that is most easy to recognise when a company is purchased and it represents the difference between the amount paid for a company and the value of the company’s assets as per the company’s accounts.
Goodwill arising on the purchase of another company will be shown on your company balance sheet as an intangible asset. This asset will reduce in value each year, until the value is nil. This reduction in value each year is called amortisation. For goodwill acquired since 2002 the amortisation in your accounts is also a tax deductible expense.
Goodwill can also be recognised on your company balance sheet on the incorporation of your self-employed business. See our case study on incorporation of a self-employed business. The amortisation of this goodwill is also tax deductible.
Gifts
Gifts given by a company to its employees are benefits-in-kind for the employee and will have to be included on the employee’s P11D. Not great if you want to buy some flowers for a newly-wed or new parent. If you buy regular gifts or have a number of staff entertainment functions such that the £150 annual party allowance does not cover all the costs then your company should apply for a PAYE Settlement Agreement, or PSA. This will allow the company to pay the tax on the gift on behalf of the employee.
The self-employed cannot receive gifts from their own business as all the income is your income and it is only the business expenses that can be deducted from the income to calculate the profit and tax theron.
Gifts to customers or suppliers are generally not deductible for tax. The exception is small gifts worth less than £50 (per person, per year) with a conspicous business logo/advertisment but not food, alcohol or tobacco.