Christmas is a time of generosity and festive frolick, however, it can also be a tax trap for the overly generous employer. Here are a few tips on how to avoid unwanted taxes.
The Annual Christmas Party
Everyone likes a good party
- Reasonable costs of entertaining staff ARE allowed as HMRC consider this to be part of the cost of managing and motivating staff
- Staff must be employed staff on payroll, not subcontractors who are really suppliers and fall under business entertainment
- The company is allowed to spend £150 per employee (including VAT), per year, on staff entertainment – this might be a summer barbecue and/or a Christmas party.
- Be careful – the £150 limit covers the total costs of all events provided during the year, it is not £150 per event.
- The £150 exemption covers all costs – not just the party itself, so if you pay for any transport or overnight accommodation – this must be included in your total Christmas Party cost.
- It must be open to all staff and must be a staff event. If the event is for clients, but staff attend, then it is considered to be Business Entertainment
- Any money the company spends inviting partners or spouses of employees must also be included total event cost, and must still amount to £150 or less per employee attending for it to be tax free for your employees.
- The £150 limit is not an allowance – it is an exemption – so be careful not exceed the £150 per person limit as this will mean the entire amount is disallowed, not just the excess over £150. If your party costs £151 per head, then the taxable benefit in kind is £151 not the excess of £1. If your staff member brought a partner or spouse to the event, then they will be taxed on the total benefit in kind of £302.
- If you are a small company with just one, two or three employees you can still claim up to £150 per employee (and guest) for Christmas party.
- Where a benefit in kind tax does arise, you may set up a PAYE Settlement Agreement (PSA) to relieve your employee of any liability. Costs will be grossed up and the tax and NI will be paid by the employer. This can be quite expensive if you have staff in the higher tax brackets so be sure to keep an eye on your budget if you want to avoid the additional tax.
- VAT on costs incurred on staff entertainment are recoverable in your VAT return
- Any money spent on partners or spouses is viewed as business entertainment and must be accounted for gross as they are NOT allowed for VAT purposes
- Costs incurred on staff entertainment are allowed for corporation tax
- As with VAT, any money spent on partners or spouses is viewed as business entertainment and is NOT allowed for corporation tax.
- We recommend you separate staff entertainment and business entertainment costs in your accounts so that you can monitor the level of spend per employee during the year and so that the costs are clearly identified when it comes to preparing your accounts and tax returns at year end.
From the employer to the employee:
- Cash gifts are always taxable and should be put through payroll along with other taxable earnings.
- Gifts under £50 are considered to be trivial and are not classed as a benefit in kind – i.e. a bottle of wine or a box of chocolates. A box of wine or a food hamper on the other hand is not considered to be trivial and would be taxable.
- Don’t be too extravagant with the presentation! The cost of gift wrapping is included in the cost of the gift so if your gift costs £49 and the wrapping costs £3.50 – the whole value of £52.50 becomes taxable.
- Gifts with a cumulative value exceeding £50 (per tax year) are considered a benefit in kind and are taxed accordingly.
- Trivial employee gifts are allowable expenses for tax purposes.
To clients or suppliers:
- Gifts are generally not allowable as a deduction against the company’s profits, i.e. they are treated much the same as business entertaining. Unless they are clearly branded or trivial – under £50.
- Trivial: Gifts to anyone outside your business with a value under £50 per person, per year is an allowed expense.
- Branded: Branded gifts are generally considered to be an advertising and marketing expense and are allowable
- Free samples of your product are also allowable for VAT and against profits.
- Food, drink, tobacco or vouchers of any value are disallowed and treated in the same way as Business Entertainment
- Unbranded gifts with a value exceeding £50 are disallowed and treated in the same way as Business Entertainment
Third party gifts to the employee:
- Goodwill gifts (such as a bottle of wine from the employer’s client) can be received by an employee without an income tax charge where all of the following conditions are met:
- the cost to the donor is less than £250 (including the cumulative cost of all gifts within the same tax year);
- the gift is the goods themselves, or a voucher to acquire goods;
- the donor is not connected to the employer, or anyone connected with the employer ;
- and – the gift is unsolicited and not given in return for the employee’s service.
- If these conditions are not met, the third party must provide the employee with information about the amount of the benefit, which the employee should then include as assessable income on their personal tax return. The third party may instead prefer to enter into a taxed award scheme which includes payment of the related tax.
Top Tips – It would be sensible to keep a gifts register and ensure all staff notify you of any gifts they received from a third party connected with your business.
We wish you a Merry Christmas!