Taxable Earnings

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We’ve all been asked by a trader to pay in cash at some point. Often this is for home related jobs such as decorating or gardening. There is a clear implication that the trader is not going to declare the earnings – in the words of Only Fools and Horses “ income tax, no VAT…”. If so, the trader could be evading tax at 40% and VAT at 20%, not to mention national insurance. The trader probably doesn’t have public liability insurance – what would happen if he mowed over the cable whilst working in your garden?

Maybe I’m being harsh. Maybe the “cash only” is simply to avoid the hassle of the banking system. Maybe all the cash earnings will be declared come self-assessment time. Maybe!

For the rest of the business world, including the millions of honest sole traders in the UK, bank transactions are far easier to handle. Today’s online bookkeeping systems such as Xero and QuickBooks connect directly to bank feeds enabling quick and easy updating of records.

But what happens if you or I, in our trades and professions, are offered something other than money in return for our services. We may be offered free shares in our client’s business; free use of our client’s facilities; free teas and coffees; or rewards in heaven. “Aha, a gift, surely I don’t pay tax on a gift – Right?”

Unfortunately that is wrong. The word “free” is a misnomer and temptation. The shares, access to facilities or unlimited drinks have not been gifted freely, they have been earned. Tax law* requires all businesses including sole traders (self-employed individuals) to use correct accounting principles and to treat  non-monetary income as if it were money. The value of the shares, etc, must be included as business income when earned, both for income tax and VAT purposes.

As for “rewards in heaven” – if there truly is no earthly reward being earned then it’s fair to say this is “tax free”. Although the person paying you better be sure they don’t have national minimum wage obligations…


As with all of our tax tips and web pages this information is necessarily summarised and of a general nature.  If you would like detailed specific advice please contact us.