Posted by Gary Mackley-Smith on December 6, 2018
Christmas is a time of giving, but keeping the tax office off the gift list may require some careful advanced planning.
At this time of year it is wise to dust off the tax code on Christmas gifts and parties to avoid making a festive foul up of the rules and looking like a turkey.
The tax rules differ depending on whether you are giving to staff or clients.
We take a look at both scenarios below.
Since 2016 the rules for trivial benefits have been enshrined in law. And whilst they may not always have a direct impact on Christmas, they can be helpful, as explained below. Broadly, a trivial benefit is one that is non-contractual, costs £50 or less per employee, and is not for services performed. If the cost exceeds £50, the whole benefit is taxed, not just the excess. Trivial benefits are capped at a total of £300 per tax year for directors, office holders and their families.
Trivial benefits can provide more scope for employers to provide Christmas gifts and parties.
Christmas is the time for office parties and a great way of making employees feel valued. Provided the function meets certain rules, they are free of tax and National Insurance Contributions (NICs).
The party must be open to all employees and the cost to the employer must not exceed £150 per head (including VAT, taxis and overnight accommodation), this being the total cost of the party divided by the total number of people attending (including non-employees).
If it is not practical to hold a single function, the £150 per head exemption can apply across separate locations and departments. For employers with more than one office, an annual event that is open to all staff based at one location still counts as exempt. Businesses can also put on separate parties for different departments, as long as all employees can attend one of them.
Having too much of a good time, however, may prove expensive. An open bar is best avoided, or at least closed at some stage in the evening. If the cost per head goes over £150 (even by just a penny) then the whole amount is taxable – not just the excess over £150. This would then have to be reported on the employee’s P11D, or the employer could choose to pay the grossed up tax under a PAYE Settlement Agreement (PSA) to retain the goodwill of staff.
Where the cost is less than £150 per head, the unused element could be spent on another staff function (perhaps in the Summer) – provided the annual aggregate spend does not exceed the £150 per head limit. If the limit is exceeded, you can choose the lower costing event as taxable.
Alternatively, where the cost exceeds £150 per head, employers could ask staff to make a small contribution to bring the cost to below the limit.
Staff entertaining may not always qualify for the £150 annual exemption, so this could be where the trivial benefit rules may be helpful if the cost per head of the entertaining does not exceed £50 per employee; it could even be for an event at a different time of year.
Rewarding staff with a festive treat may not be gratefully received if it comes with a tax tag. For example, a gift of cash would be taxable as earnings in the normal way.
HM Revenue & Customs (HMRC) does not tax seasonal gifts to staff, such as a turkey, an ‘ordinary’ bottle of wine or a box of chocolates, so long as the cost is less than £50 a head (a trivial benefit). Gifts worth more than this, such as a hamper or a case of wine, may have to be reported on the employee’s P11D, or included in a PSA.
Where an employer provides employees with immunisations against seasonal flu (“flu jabs”), the benefit should be treated as trivial and not reportable.
There must also be no contractual entitlement to a gift, and it cannot be given as a reward. But just because a gift is given each year, or is given to all staff, doesn’t mean the employee has a contractual right to it.
Cash vouchers given to staff are taxable in full in the same way as ordinary earnings. The face value of the voucher, regardless of the cost to the employer, has to be accounted for via PAYE.
Non-cash vouchers can benefit from the trivial benefit rules, so employees could be given a store voucher, for example, that does not exceed the £50 limit. Previously, non-cash vouchers had to be reported on the P11D, or included in a PSA.
NOTE: Any event or gift must not be part of a salary sacrifice arrangement. If it is, the employer will have to report how much the event or gift is worth to each employee.
Christmas presents in cash from someone other than the employer are taxable earnings if:
Such a gift should not be taxable where the cost to the donor in a tax year does not exceed £250 (including VAT, whether or not it is reclaimable).
Employers cannot claim a tax deduction for client entertaining. Where clients attend your Christmas party, the costs have to be apportioned between them and employees for tax purposes.
Business gifts to clients are not normally allowed as a deduction against profits – they are treated in the same way as business entertaining. There are exceptions:
Christmas cards to clients and prospects are considered an office expense and are deductible, provided they carry a clear advertisement for the company sending them.
When rewarding third parties, such as clients or suppliers, with gifts that are taxable (such as non-cash vouchers), a Taxed Award Scheme (TAS) can be set up to deal with any tax and NICs. No employee NICs are due on gifts to third parties made under a TAS.
VAT on client entertaining is not recoverable, though it can be for employee entertaining. The definition of employees for VAT purposes excludes partners of existing staff, or former employees, so VAT claims have to be apportioned where a party includes guests.
VAT should not normally be reclaimed where any entertainment is provided only for directors, partners or sole proprietors, unless they attend the party with other staff members.
If you have any queries regarding festive gifts or parties and wish to avoid a festive hangover, please contact your usual Bishop Fleming adviser.