With the festive period rapidly approaching, employers will be planning a staff Christmas party, or gifts for their employees or client/suppliers/intermediaries.
Here is a quick reminder of the tax rules to help you plan and have a great Christmas.
Provided the event meets all of the following conditions, then no benefit in kind charge arises for the employee:
- an annual party or social function, such as a Christmas party or summer barbecue;
- it is open to all employees (or all employees based at one location);
- the cost does not exceed £150 per head (inclusive of VAT), including spouses/partners.
The total cost of the party is the whole cost of the event, from the start to the end. It includes food, drink, entertainment, taxis home, overnight accommodation etc.
The limit of £150 per head applies to all those attending the function not just employees. So, if employees are allowed to bring guests, the total cost should be divided by the total number of employees and guests.
Two or more functions
If there are multiple annual events, they will still be exempt as long at the combined cost is no more than £150 per head. A record should be kept to support this position.
If you have already used up the £150 exemption, you will have to report and pay tax on the full costs of any additional events, even if they cost less than £150 per head on their own.
A taxable benefit in kind will arise if either the limit is exceeded, or the function is not open to all staff or it is not an annual function.
Please be aware that the £150 per head limit is an exemption not an allowance – go just a penny over the £150 and the full cost becomes taxable. Hence the reason to maintain evidence to support the per head amount.
The taxable benefit must be reported on each employee’s form P11D. The employee will pay income tax on the benefit, and the employer will be charged Class 1A national insurance.
Alternatively, the employer can apply to pay the grossed-up tax through a PAYE Settlement Agreement (PSA).
Are the costs tax deductible for corporation tax or business tax purposes?
Client entertaining is generally not an allowable expense for corporation tax purposes. However, the cost of employee entertaining is an allowable expense, and therefore the cost of the staff Christmas party can be deducted. If clients or customers are invited, (if you are brave enough), then this element would have to be disallowed, as client entertaining.
Input tax on employee entertaining is generally recoverable. However, please note that the definition of employees for VAT purposes does not include partners/spouses of staff or former employees. Therefore, if guests are invited it will be necessary to apportion the relevant costs appropriately. (This is a common “hit” HM Revenue & Customs look for on a VAT check).
Please also note that if an event is provided only for directors, partners or sole proprietors, HMRC will not accept that input tax has been incurred for business purposes.
GIFTS TO EMPLOYEESCash bonuses & vouchers
Christmas presents paid in cash to staff will be taxable as earnings in the normal way (subject to tax and national insurance). The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher.
Vouchers exchangeable for goods and services only (non-cash vouchers) are also taxable and must be reported on the employee’s form P11D. Class 1 national insurance will normally need to be deducted through the payroll.
Make sure you tell your accountant or the person who prepares the payroll, so they can report the correct figures to HMRC.
The employer may wish to give employees a seasonal present, such as a turkey, a bottle of wine or a box of chocolates. Provided the cost of the gift is ‘trivial’ – typically less than £50 a head – the gift will usually not be taxable.
If the gift exceeds this value, it will be taxable and it will need to be reported to HMRC on either a form P11D or through a PSA, as set out above for staff parties.
Gifts by third parties to employees
Employees may receive gifts from third parties as a result of their employment. As long as the gift does not exceed £250 in cost, it should not be taxable for the employee.
Remember to log the gift for the purposes of the Bribery Act, if it is significant.
Gifts to third parties (clients/customers/intermediaries/suppliers)
Third party gifts fall into the category of entertaining and, as a general rule, expenses incurred by a business in providing entertainment in connection with a business are not tax deductible. However, tax law does provide a number of exceptions to this where the cost of a gift can be deductible, as follows:
- Where the gift incorporates a conspicuous advertisement for your business, for example, a branded golf umbrella, mousemat or diary; and
- The cost of the gift does not exceed £50.
Note that gifts of food, drink, tobacco, or any voucher that can be exchanged for goods, then that is not tax deductible, even if the festive chocolates or bottle of beer are emblazoned with the business logo.
VAT on Christmas GiftsWhen it comes to VAT, you can claim the input VAT on gifts acquired for business purposes, which includes gifts for staff and customers but not things you buy for yourself or your family and friends. However, if the cost of gifts given to a person in a 12-month period total more than £50 (excluding VAT) and you have claimed the input VAT, you will have to charge output VAT on the total cost of the gifts. This rule applies to all types of gifts and if you think it is likely to apply, it might be easier not to claim the input VAT in the first place.
Not wishing to ruin your Christmas, but we thought a bit of advice/reminder in advance may help. If it is the case that your best long-standing client/customer likes an expensive bottle of brandy, their importance to the business is more important than tax relief!Should you need to discuss or have a query, please do not hesitate to call the office.