Is VAT payable on extra charge of £1 per drink to pay singers?
One of my clients operates a bar as a partnership. They provide singing acts on a Friday and Saturday evening between 8.30pm and 9.30pm and then from 10pm until 11pm. During these time windows, they charge customers an extra £1 on all alcoholic drinks and all money collected is directly paid to the acts, ie my client makes no profit on these extra charges. A till receipt is given to each customer that clearly shows the price of the drink and then £1 headed ‘donation’. My client has confirmed that no customers have ever challenged the extra charge. We show the money received and paid out as income and expenditure for the same amount on the client’s accounting system. The singers receive no other payments for their work.
My view is that the customers are making a donation of £1 towards the acts; if they didn’t want to donate, they could buy their drinks before 8.30pm; between 9.30pm and 10pm; or after 11pm until the bar closes at midnight. Is my approach correct? A colleague thinks I am wrong.
To quote from HMRC’s guidance, VAT Notice 701/1, a donation should be ‘freely given with nothing received in return’. Our customers are still getting the same pint of beer or glass of wine that they would get if they paid £1 less when the acts were not on the stage. What do readers think?
Query 20,707 – Cabaret Clare.
Financial compensation
My client has received £21,000 from the financial services compensation scheme (FSCS). The accompanying letter says ‘depending on your income and circumstances, you might need to pay tax on this sum. You can check this by talking to HMRC or a tax adviser’. I am that tax adviser, but I find it hard to give a definitive answer. The compensation relates to mismanagement of some family trusts by an investment firm, but it all happened so long ago that the client had assumed that no money would be forthcoming, and he has thrown away the paperwork. He cannot remember what the trusts held or even what the nature of the mismanagement was.
The letter states that the FSCS received the money by way of a dividend from the investment firm’s liquidators. It also says: ‘When you signed our application form, you agreed that once we paid you compensation, you would transfer your rights against the firm … to FSCS.’
Does that mean this is a disposal of a ‘chose in action’, which would make it a chargeable gain with no base cost? Or does it depend on the nature of the underlying rights, in which case how do I find that out? Would it be enough to disclose the circumstances in the white space of the tax return and leave it to HMRC to ask a question?
Query 20,708 – Payout.
A gift by any other name?
I’m hoping readers can settle a discussion for a client regarding payment of inheritance tax (IHT). Following a sudden death, the will of the deceased leaves cash to his widow and his other assets, all of which are illiquid, to his children. It was a second marriage for both the deceased and the widow, and she is not the mother of the children.
The widow has offered to contribute towards the IHT bill from the funds she has in the joint accounts she held with her husband. She has always had her own separate bank accounts, which were not joint accounts. All interest earned on the joint accounts has always been the income of the deceased and the joint accounts only included his income, not that of his wife.
‘The man down the pub’ is adamant that if she makes a direct payment of IHT to HMRC, it will not count as a gift. But others are not so sure. Readers’ thoughts would be appreciated as to who is right. If it is a gift, which would fall into the widow’s estate should she die within seven years, is there any way this potential charge could be alleviated?
Query 20,709 – Family Friend.
Worthless shares
My client invested £2,400 in enterprise investment scheme (EIS) shares some years ago, receiving £720 in income tax relief at the time. No gains were deferred against the subscription. The company has recently been taken over by a large corporate in a rescue operation, and my client understands that the shares are worthless – they have not been bought out, but they are now subordinated to new shares owned by the acquirer and are unlikely ever to receive any return.
I would like to claim the loss of £1,680 against his income for 2025-26 by making a negligible value claim, but I am not sure how to go about that. Do I contact Shares and Assets Valuation Division separately, giving the details, or do I simply make the claim on the tax return and wait to see if HMRC asks a question? In either case, what evidence should I put forward in support of the claim?
Query 20,710 – Loser.
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