Information about how tax affects prizes
Do winners of prizes given away in a promotional competition have to pay tax on their winnings?
What is the tax treatment for prize incentive schemes for employees?
If I issue a "money off next purchase" voucher, what is the VAT treatment?
Is it ever possible to advertise the VAT-exclusive price of a product?
If copyright in advertising material is assigned, does this have any tax implications?
If I use freelances and don't deduct PAYE does this prove they are not my employees?
Do winners of prizes given away in a promotional competition have to pay tax on their winnings?
No. Provided the event is not a prize incentive scheme for employees of the event promoter, no tax is payable by winners.
What is the tax treatment for prize incentive schemes for employees?
Whether the employer or a third party provides the prize, employees are taxable on prizes awarded under such a scheme. This is regardless of whether the award is in cash or kind. Employers who wish to avoid their employees having to deal with the PAYE implications of these awards can make arrangements with the Inland Revenue to set up a taxed award scheme. Under such a scheme, the employer can pay the basic and higher rate tax due on the value of the award, having agreed that value with the Inland Revenue in advance.
If I issue a "money off next purchase" voucher, what is the VAT treatment?
Following a case that went all the way to the European Court of Justice, the position is that when the "next purchase" is made, VAT is payable by the retailer on the net amount paid for the product (i.e. the marked price less the 10p reduction obtained by handing over the voucher).
Is it ever possible to advertise the VAT- exclusive price of a product?
Yes it is, but only in a medium that is wholly or mainly directed at business customers. Quoting VAT-exclusive prices outside this narrow exception would involve an offence under either the "misleading price indications" provisions of the Consumer Protection Act 1986 or the Price Marking Order of 1991. It would also, if it were in a printed advertisement, need the Committee of Advertising Practices self regulatory British Code of Advertising.
If copyright in advertising material is assigned, does this have any tax implications?
Yes it certainly does. The assignment of intellectual property rights will attract Stamp Duty unless it is part of a transaction whose total value is less than £60,000. If the "less than £60,000" exception applies, then it is advisable to include a certification to that effect as a term of the contract of assignment. If no such certification is included in the contract, then negotiations will have to be entered into with the Inland Revenue as to the appropriate value to be placed on the transaction of which the assignment forms a part. Stamp Duty will then be payable on that value. Failure to pay Stamp Duty on an assignment of copyright or other intellectual property rights can have serious implications. For instance, if the assignee later wishes to sue a third party for infringement of the rights purportedly assigned, he will not be able to persuade the court that he has proper title to the rights in question and can therefore sue, unless he produces evidence that the appropriate Stamp Duty has been paid. This is done normally by producing the original assignment document with a suitable stamp applied by the relevant officer of the Inland Revenue. One way around these complications which is often adopted is to deal with the transfer of the intellectual property rights by way of two documents. The first is an agreement to assign copyright forthwith on the written request of the prospective assignee. The second document is the formal assignment of the right itself. It is only the second document that will attract Stamp Duty. Incidentally, Stamp Duty can be paid after the date of the document which should have been stamped, but there will be a penalty by way of a surcharge!!
If I use freelances and don't deduct PAYE does this prove they are not my employees?
No it does not. In coming to a view as to whether an individual is as a matter of law an employee, the court will look at all the surrounding circumstances. If it appears that the individual is effectively working full time at the office of the agency and under the agency's continuous direction, the chances are that the individual will be regarded as an employee as a matter of law and the employer will be regarded as liable to deduct PAYE from any remuneration paid to that individual. It is unlikely that an agency would actively encourage such a situation to arise, but if the freelancer is being retained in circumstances which in effect make the freelancer an employee as a matter of law, this should not necessarily be relied upon so as to vest in the agency intellectual property rights in any material produced by the freelancer. The only foolproof means of ensuring that all copyright in material produced by freelancers is vested in the agency is to have the freelancer execute an agreement assigning or agreeing to assign to the employer all intellectual property rights in all materials which the freelancer creates.
