As Christmas approaches, we always find that this is a good time to recap the tax rules relating to gift-giving and Christmas parties.
When it comes to rewarding employees for their hard work throughout the year, employers should be aware of the tax, National Insurance, and reporting obligations that come with doing so.
Staff Christmas parties – exemptions, calculating the cost and reporting
According to HM Revenue & Customs (HMRC), the total cost of a staff party must not exceed £150 per head in each tax year, and the event must be for employees only. The invitation to attend must be extended to all members of staff.
If your business has more than one location, an annual event that’s open to all of your staff based at one location still counts as exempt.
The total value needs to be inclusive of VAT and other associated costs such as transport to the party and/or accommodation for overnight stays.
You may put on more than one function, but the combined costs should be no more than £150 per head if it is to remain exempt. Worth noting is that the exemption also applies to virtual/online Christmas parties.
If you exceed the £150 per head limit, the entire amount is then treated as a taxable ‘benefit’ and so must be declared on a P11D.
The employee will pay income tax on the benefit, and the employer will be charged Class 1A National Insurance.
A company holds an annual Christmas party for all its staff. The average cost per employee is £45. This is, therefore, exempt.
In addition to the above, the directors hold an annual party at Christmas for directors only (i.e., it is not open to staff generally) at a cost of £75 per person. Since the function is only available to the directors, the full benefit is chargeable on those attending.
A company holds 2 annual dinner dances open to all its employees in the tax year.
The total cost of the first, including transport and accommodation provided for certain guests, was £10,000 including VAT. The total number of persons attending was 100 and the cost per head was therefore £100. The second event cost £8,000 including VAT, and 100 people attended this. The average cost was therefore £80.
The total cost per head for both functions was £180 so they cannot both qualify for exemption. Since the cost per head of each party on its own was not more than £150, either event can qualify for exemption on its own, i.e., the benefits arising from the first function will be exempt and those arising from the second function will be charged (or vice versa).
Getting gifts right – a trivial matter…
Trivial benefits are ‘token’ items of value that are given to an employee, but that do not count towards taxable income.
To qualify, the gift must meet ALL of the following conditions:
- The gift is not detailed in the terms of the employees contract
- It is below the value of £50
- It is not a performance-linked reward
- It is not cash, or a cash voucher.
A trivial benefit in kind could include a Christmas lunch, a small Christmas present, or a gift on the day of an employee’s wedding, for example.
If the gift does not satisfy all of the aforementioned criteria, it must be reported to HMRC as a benefit in kind, and the appropriate tax must be paid on the benefit – i.e., vouchers exchangeable for either cash, or goods and services.
Tax deductible costs and VAT
Employee entertaining is considered an allowable expense, and so the cost of the staff Christmas party is tax-deductible, however gifts are not a tax-deductible expense.
As for VAT, where employee entertaining is concerned you are generally able to reclaim the input tax. However, costs must be apportioned if guests are allowed to attend the event – i.e., spouses of staff.
Input tax cannot be recovered where the event is for directors, partners or sole proprietors only.
VAT incurred on the purchase of a gift may be reclaimed if you are not using the Flat Rate Scheme.
Incidental expenses, as described by HMRC, are expenses that are “incurred by an employee while travelling overnight on business”.
These may include paying for a laundry service, or using the hotel telephone to make a call to home.
As long as the value of the expenses does not exceed more than £5 per night, for travel within the UK, and £10 per night for travel outside of the UK, they do not have to be reported to HMRC.
How can George Hay help?
If you would like to discuss with us the most tax-efficient means of rewarding your staff this Christmas, contact us today.
Link: Tax on trivial benefits