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Christmas is a time of giving but keeping the tax office off the gift list may require some careful advanced planning. We take a look at what is allowed and what may trip up the unwary.
A legacy of past Covid lockdowns and social distancing rules means that some Christmas events continue to take place virtually rather than in a physical location.
So, whilst the guidance below for a physical event will be relevant for many, some employers may wish to hold an online event instead.
In the absence of an actual party, there are numerous online courses, quizzes and events that could be booked for employees, or alternatively consideration could be given to delivering a drinks/food hamper to people at home.
Whether it be an online event or a gift in the post, the tax rules can be important to understand.
This year employers may choose to provide employees with a hamper or a voucher for food/drink. Whilst the annual functions exemption mentioned below would not be available, such a gift could be covered by the trivial benefits rule.
Since 2016 the rules for trivial benefits have been enshrined in law.
Broadly, a trivial benefit is one that is non-contractual, costs £50 (including VAT) or less per employee and is not for services performed.
But be careful. If the cost exceeds £50, the whole benefit is taxed, not just the excess.
Where the individual cost for each employee cannot be established, an average could be used.
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, although with no legislative provision to increase the £50 cap for inflation, the amount itself is becoming trivial over time.
Christmas is often the time for office parties and is 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).
This exemption has to be used for annual events and cannot be used for a one-off function such as the 100th anniversary of a company.
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 form P11D for each employee that attended (or via payrolling the benefit if the employer has registered for this), 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.
Holding a virtual event via Zoom for example is an alternative to a physical event. The main point to note is that in order to ensure the annual function exemption is available, some kind of register of attendance may be necessary.
Entertainment could be booked for the event, or perhaps there might be a Christmas quiz.
Working alongside this online event qualifying for the annual function exemption could be the delivery of up to £50 worth of vouchers or a hamper which would be covered by the trivial benefits exemption. Both exemptions could be claimed.
The key thing to remember is to keep a proper record of all the costs to ensure the exemption limits are not exceeded.
HMRC has previously confirmed that:
"Annual parties or events for employees are exempt from tax where the cost does not exceed £150 per head. Festive events for staff will be different during the pandemic, so we're confirming today that this exemption will also apply to the costs associated with virtual parties - including gifts for consumption at the party."
HMRC also updated its official guidance:
"Where an annual function is provided virtually using IT then the exemption is capable of being met provided all other conditions are also satisfied as the exemption applies to allow for costs of provision which are generally incurred for the purposes of the event itself."
providing an example:
"A company holds one annual function in a tax year and does so virtually using IT. All employees are invited and each is provided with a hamper consisting of some food and drink to be enjoyed by the attendees during the party. The total cost per head is £100 which is within the £150 exemption and so the exemption applies."
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.
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 an expensive 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 employees 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 generally 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 or require our assistance in reviewing the benefits you provide to your employees, please contact your normal Bishop Fleming contact or a member of the Employer Solutions team.
For more information on employer issues check out our Employer Solutions Knowledge Hub.