Tax write offs

[Starlit]

Tangentally mentioned in the Game On thread, I have realised that after four decades on this planet I don't understand what a tax write off is, despite having heard the term countless times.

Can someone explain in simple terms how giving away / badly investing / otherwise losing 100% of some money is more beneficial than paying up to 50% of it in tax and keeping the rest.

I've understood tax write offs to be generally legitimate as opposed to giving somebody £500 and them writing down that you invested £5,000,000 with them or something like that.

[Buelligan]

Not sure, I'm useless with stuff like that but I'm friends with a Nigerian prince who would be happy to advise, shall I give him your number?

[touchingcloth]

Is the general idea that you claim some of the things you've spent money on as "expenses"?

For example if you went from an employee of a business earning £1,000 a year and spending £100 a year on home internet, your income tax would be charged in your £1,000 income. If you became a self employed person also earning £1,000 and spending £100 on internet, you could claim the internet money as a business expense and therefore only pay income tax on your net £900 income.

So that, but with professional accountants getting involved and being creative with what stuff constitutes an expense to reduce your taxable income as much as possible.

This sort of thing is how Starbucks managed to avoid paying taxes in the UK. Their UK subsidiary "paid" their US subsidiary to licence the usage of the brand, and fudged those fees to be high enough that the UK arm made a loss. The UK subsidiary also "bought" their beans from a subsidiary based in another country where their tax bill for the profit on the beans would be lower.

I'm not sure that deliberately actually losing money is a sound strategy that will somehow leave you with money in your pocket, but you can "lose" money in the Starbucks way by paying it to another business you either own or have interests in. I seem to remember Trump's golf resorts do something similar, and record a loss on paper because they buy golf balls from a separate company he owns at an exorbitant rate well above what any sane company would pay to an unrelated supplier.

Hollywood famously does this; a film studio will charge themselves via subsidiaries for distribution and marketing, meaning the profit or loss the film itself makes can be essentially any number they like. Actors who opt to earn a percentage of a film's profits have historically been screwed over by this because fantastically successful films can have a legal fiction create that makes them look like they lost rather than made money, so asking for a share of the gross box office takings is the wiser move.

[BeardFaceMan]

Ah, so when Frank Skinner spunks away 10 grand on an Elvis shirt and then wears it on a tv show so he can claim it against tax as a business expense, that's what's going on? I did wonder about that sort of thing.

[Darles Chickens]

See also these millionaire wankers with their superyachts. More often than not, the luxury yacht is a company asset, and one which costs an inordinate amount each year to run (crew, maintenance, mooring fees, fuel, etc). So the business can claim reduced taxable profits after deducting running costs, plus they get a fucking yacht for jollies to the Caribbean.

[touchingcloth]

Hmm, I'm not sure that buying a £10k shirt would work for that because any savings he made in tax would be more than offset by the fact that he owned a shit shirt that cost him £10k. As I understand it, he'd need to set up Frank's Shit Shirts Ltd. in Jersey, but an Elvis shirt via that company for 50p, then sell it to Frank Skinner the man in the UK for £10k. Frank the man has then "spent" £10k that he can claim he's no longer liable for UK tax on, though the Jersey company would be liable for whatever the corporation tax on the £9,999.50 profit. Then the Jersey business could fudge the numbers through some other means - maybe a US subsidiary called Skinners Elvis Library LLC owns the rights to the image on the shirt? - and Frank has evaded huge amounts of tax.

[touchingcloth]

There's basically no point in any of this unless the income tax you would save would cover the costs of the accountancy work and the admin of setting up companies and leave some money left over for you.

A similar ruse was that used by Jimmy Carr and Take That, where they set up companies in Jersey, then used those companies when performing their gigs. If Jimmy played the O2 arena then the venue would hire Jersey Jimmies Ltd. to provide an evening of entertainment, and Jimmy Carr the man would have an employment contract with the company in Jersey rather than the venue in London.

[BeardFaceMan]

Hmm, I'm not sure that buying a £10k shirt would work for that because any savings he made in tax would be more than offset by the fact that he owned a shit shirt that cost him £10k. As I understand it, he'd need to set up Frank's Shit Shirts Ltd. in Jersey, but an Elvis shirt via that company for 50p, then sell it to Frank Skinner the man in the UK for £10k. Frank the man has then "spent" £10k that he can claim he's no longer liable for UK tax on, though the Jersey company would be liable for whatever the corporation tax on the £9,999.50 profit. Then the Jersey business could fudge the numbers through some other means - maybe a US subsidiary called Skinners Elvis Library LLC owns the rights to the image on the shirt? - and Frank has evaded huge amounts of tax.

As I remember it, he bought the shirt, there was a question of whether it was authentic or not and he made a documentary about it, I'm sure I've heard him talk about writing it off against tax or something similar.

[Starlit]

See also these millionaire wankers with their superyachts. More often than not, the luxury yacht is a company asset, and one which costs an inordinate amount each year to run (crew, maintenance, mooring fees, fuel, etc). So the business can claim reduced taxable profits after deducting running costs, plus they get a fucking yacht for jollies to the Caribbean.

Hmm, I'm not sure that buying a £10k shirt would work for that because any savings he made in tax would be more than offset by the fact that he owned a shit shirt that cost him £10k. As I understand it, he'd need to set up Frank's Shit Shirts Ltd. in Jersey, but an Elvis shirt via that company for 50p, then sell it to Frank Skinner the man in the UK for £10k. Frank the man has then "spent" £10k that he can claim he's no longer liable for UK tax on, though the Jersey company would be liable for whatever the corporation tax on the £9,999.50 profit. Then the Jersey business could fudge the numbers through some other means - maybe a US subsidiary called Skinners Elvis Library LLC owns the rights to the image on the shirt? - and Frank has evaded huge amounts of tax.

But in these examples as far as I can see, unless one has set up a convoluted multi-national multi-company structure to take advantage of differing tax rates (which isn't the same as a tax write off), in order to avoid paying tax on a large amount of money that money has to be spent and as tax due is never greater than 100% of the taxable amount, they are left with none of that money and an item that seems to be almpost a white elephant.
So how are they better off, other than feeling clever for not paying money to the tax man?

Whenever I've heard the term it always sounds like a simple, one step action - spending this money reduces the tax that has to be paid. I just don't understand the actual maths of it.

[Darles Chickens]

Whenever I've heard the term it always sounds like a simple, one step action - spending this money reduces the tax that has to be paid. I just don't understand the actual maths of it.

Yes, I think a "write-off" really means exactly that.  So if you're a self-employed tradesman, your expenses (e.g. materials, travelling costs, staff) are deducted from your total revenue and you pay tax on what's left.  These expenses are the write-offs, and this page agrees.  As a tradesman, you probably couldn't claim your monthly Netflix subscription as a write-off, and I assume that a tax audit can dive deep into this stuff and determine if you're taking the piss.

In the case of the Elvis shirt, I guess since its only purpose was as a prop in a professional context, it could be written off.  He's still £10k down, but he would pay less tax as a result (not £10k less of course).  If the investment affords more success in the future, breaking even or returning a profit, then its job is done.

In the case of the luxury yacht, these are just people with money to burn who list it as a company asset so that it costs them less.  What else are they going to do with all their money?  Help make the world a better place?

[touchingcloth]

Some of my work touches on people who solicit donations from wealthy individuals in the UK and US. I know in those circles donations are in some cases tax exempt, meaning that someone can make a £100,000 donation in order to reduce their tax bill by £100,000. I've tried to ask the fundraisers I work with in what sense this is of any benefit to anyone, but as far as I can make out it's purely something an ideologue would do, and they'd rather that amount of money went to a good cause like the NRA rather than something horribly socialist like public healthcare.

I really don't know whether a £10k t-shirt would fall into the "let's me keep more money for myself" camp or the "lets me play god and gain no money but choose where my money goes to" one.

If Frank a) doesn't genuinely place a £10k value on the shirt and b) isn't faffing around with subsidiary companies to use the shirt to shuffle his tax liability between them then I'm as clueless about the purpose of it as the OP.

We also shouldn't forget that Frank has always been quite vocal about how well he did for himself in the 90s, so it's not impossible that he wore a shit cheap Elvis shirt and saw an easy "it cost £10k - tax write off!" joke in it.

[BeardFaceMan]

I forget the exact details but he definitely spent just over 10 grand on a shirt that was supposed to have been worn by Elvis. I think then there were rumblings it was fake and he made a documentary about him trying to find out, I think that was the order. But you're right, it may have just been a gag about him then wearing the shirt on his chat show so he could write it off against tax.

[Starlit]

I know in those circles donations are in some cases tax exempt, meaning that someone can make a £100,000 donation in order to reduce their tax bill by £100,000. 

Do you mean they can then pay £100,000 less tax or they pay tax on £100,000 less of their income?

Either way they still have to give away £100,000.

The more I think about the more I reckon a tax write off is actually fairly boring, and I think when I have heard it mentioned it has been used incorrectly to imply that somehow more money than the actual loss is being saved. As I don't anticipate being in a position where I need to decide whether to do a tax loss or not I think I'll leave it others for now

[paruses]

With the shirt example the buyer gets a 10K shirt that they would have spent 10k of their own money on but at the same time gets to knock 10k off the company's / personal (depending on your set up) tax liability. A more relatable example might be laptops, various bits of tech, books, expensive pens. You're just spending the money you would spend anyway but also subtracting it from the amount you have earned that's liable for tax.

Or, if you like, for every pound you expense your tax allowance goes up by a pound.

I suppose for big charity donations etc you're getting PR, networking, contacts maybe, plus some money off a tax bill too.

Do you mean they can then pay £100,000 less tax or they pay tax on £100,000 less of their income?

Either way they still have to give away outlay £100,000 but not out of their own pocket, so to speak.

The more I think about the more I reckon a tax write off is actually fairly boring, and I think when I have heard it mentioned it has been used incorrectly to imply that somehow more money than the actual loss is being saved. As I don't anticipate being in a position where I need to decide whether to do a tax loss or not I think I'll leave it others for now

[Darles Chickens]

The more I think about the more I reckon a tax write off is actually fairly boring, and I think when I have heard it mentioned it has been used incorrectly to imply that somehow more money than the actual loss is being saved. As I don't anticipate being in a position where I need to decide whether to do a tax loss or not I think I'll leave it others for now

When I was a freelancer, I had to fill out a declaration every three months, and eventually you get to understand what kinds of regular costs (e.g. internet, petrol) you can "write off".  You're completely right though that it's mind-numbingly dull, but it you were ever to become self-employed in some way, this stuff would become relevant.  It's not just yer Amazons and yer Teslas that care about this stuff.

With the shirt example the buyer gets a 10K shirt that they would have spent 10k of their own money on but at the same time gets to knock 10k off the company's / personal (depending on your set up) tax liability. A more relatable example might be laptops, various bits of tech, books, expensive pens. You're just spending the money you would spend anyway but also subtracting it from the amount you have earned that's liable for tax.

Yeah, exactly.  There's another facet to this too - the VAT you pay on company expenses can be balanced by the VAT you charge for your goods or services; if the latter is greater, essentially you get this stuff VAT-free, which is another motivation for writing it off.

[katzenjammer]

How about this?

You own a company and want to go on holiday to Australia so you organise a business meeting there on one day and your company pays for the whole trip (first class, 5* hotel, natch) and the cost comes out of the profit for that year so the company pays less tax.

Or...

Your company is doing well and about to make  £100 million profit, but oof! £19 mil of that has to go to the tax man.  Hmm the lobby's looking a bit tatty, a genuine Van Gogh would brighten the place up a bit, here's one that costs £100 million by lucky hap. All of a sudden profit equals zero so tax equals zero. What a shame

[paruses]

How about this?

You own a company and want to go on holiday to Australia so you organise a business meeting there on one day and your company pays for the whole trip (first class, 5* hotel, natch) and the cost comes out of the profit for that year so the company pays less tax.

I know of various people whose chosen holiday destinations have coincided with there being an industry expo or conference there at the same time - so why not combine the two and write it off? I don't recall any of them coming back laden down with mouse mats and lanyards or any additional knowledge.

[Darles Chickens]

Your company is doing well and about to make  £100 million profit, but oof! £19 mil of that has to go to the tax man.  Hmm the lobby's looking a bit tatty, a genuine Van Gogh would brighten the place up a bit, here's one that costs £100 million by lucky hap. All of a sudden profit equals zero so tax equals zero. What a shame

In this case though, all you've got is a crummy painting in the lobby which looks a little bit as if it could've been painted by a child.  So no tax, but also no liquid assets.  You'd better hope you can flog it on Ebay for a bit more than you bought it for.

[touchingcloth]

Do you mean they can then pay £100,000 less tax or they pay tax on £100,000 less of their income?

Either way they still have to give away £100,000.

$100,000 less tax, I believe. If you earned millions of dollars so that your entire income tax would be $100,000, then it's essentially choosing to make a donation of that amount to a charity of your choice and giving the government $0 in tax. Is how it's been explained to me, at least!

[touchingcloth]

In this case though, all you've got is a crummy painting in the lobby which looks a little bit as if it could've been painted by a child.  So no tax, but also no liquid assets.  You'd better hope you can flog it on Ebay for a bit more than you bought it for.

Take out loans secured against the painting and put them in a high interest thingy.

[paruses]

$100,000 less tax, I believe. If you earned millions of dollars so that your entire income tax would be $100,000, then it's essentially choosing to make a donation of that amount to a charity of your choice and giving the government $0 in tax. Is how it's been explained to me, at least!

I don't think this is right. Your 100k donation would reduce your tax liability by 100k i.e. millions of dollars minus 100,000 dollars would be the amount that the tax would be calculated on. In the UK, at least.

Re: the paintings (this is a personal thing not a company thing)- isn't there a national register of art so that you can buy said Van Gogh, or more likely one of those artists you've not quite heard of on Fake or Fortune (it's a Fortune if you've not heard of them), and claim that as a tax write off? The stipulation is that it has to be available for the public to view. They have to make an appointment to view it rather than just turn up though. Because of this the owner of the art can make it very difficult or impossible. I thought Mark Thomas had a bit where he organised a coach party to tramp through Lord Arsehole of Somewhere's house to look at a painting. Needless to say his lordship was not very amenable to the idea. 

[Gurke and Hare]

I don't think this is right. Your 100k donation would reduce your tax liability by 100k i.e. millions of dollars minus 100,000 dollars would be the amount that the tax would be calculated on. In the UK, at least.

Yeah, and in the US as well I'm 100% sure.

I thought Mark Thomas had a bit where he organised a coach party to tramp through Lord Arsehole of Somewhere's house to look at a painting. Needless to say his lordship was not very amenable to the idea. 

Lloyd Webber, I think. If that wasn't him, Private Eye certainly reported on him using that scheme at one point.

[Dex Sawash]

My boss was filling out some end of year tax forms for his use of company car. He needed to enter how many trips to/from work he did in the company car in 2021. At a loss for any way to figure out this unknowable, threw up his hands and entered 1500.

Not sure if that made it a 5x write-on or 5x write-off.