It's that time of year again, Christmas!
What if you decide to give your hardworking staff gifts and what are the tax implications for putting on that all important annual office Christmas party!
Gifts for employees
As an employer, if you give your employee a cash Christmas present or a voucher for a shop, it will be subject to tax. The whole value of the voucher is taxable.
If you give your employee’s a seasonal gift of a value less than £50, this will not need to be taxable as this is classed as a trivial gift. If the gift is above £50, this will need to be either submitted to HMRC by means of a P11D benefit in kind form or on a PSA (PAYE settlement agreement). If the value exceeds £50 even by a small amount the whole sum is taxable.
An employee may receive a gift from a third party, a client who he/she has been working with. As long as the present does not exceed £250, then this is not taxable.
There is tax relief on annual parties for entertaining all employees. The relief is £150 including VAT. If the cost goes over £150 a head, then the whole amount is subject to tax and needs to be put on a P11D. £150 applies to everyone who goes, this could include an employee’s guest.
The calculation of £150, must include taxis home and overnight accommodation. Instead of declaring the tax on a P11D form, the grossed up tax can be paid via a PSA (PAYE settlement agreement) by the employer.
If the employer provides two or more functions, all the functions will be exempt provided the total cost per head does not exceed the £150 limit. So, if a Summer event costs £40 per head and a Christmas event costs £100 per head, both functions will be an exempt benefit. If the total cost exceeds £150 per head, whichever functions best utilise the exemption are exempt. If the Summer event cost £60 per head and the Christmas event cost £100 per head, the employee would be taxable on the Summer event and the Christmas event would be exempt as this gives the greater benefit to the employee. If there was a third event costing £80 per head, this event and the Summer event would be exempt, as together they total £140 per head, and the Christmas event costing £100 would be taxable.
Tax on business profits
The cost of employee entertaining is allowed to be deducted for corporation tax. It is however only for employees and not for clients and customers, which are disallowed in the calculations so you must calculate the proportion correctly.
Only entertaining staff is eligible for recovery of VAT. It is not recoverable for partners of employees or former employees. If partners of employees or former employees do attend, this will need to calculated and apportioned for VAT.
If at the Christmas party, there are directors, partners or sole proprietors, the cost of the VAT is not blocked from recovery. However, if the party is just for directors, partners or sole proprietors, then the VAT is not recoverable.
So what constitute's a trivial gift?
Unfortunately there is no definition of trivial so provided it is under £50 and is not cash it should be acceptable. This only applies if the gift provided to the employee is not a contractual obligation and is not provided in recognition of particular services performed by the employee as part of their employment duties. Flowers, a box of chocolates, a meal out are just some examples of trivial gifts
What costs are attributed to the £150 limit HMRC provide as tax allowable?
The cost of the event not only includes function room hire, food and drink but also taxis home, suit hire and any accommodation provided and all go towards the £150 limit.
I am providing a case of wine for all my staff to the value of £40 for Christmas but I have a few members of staff who do not drink. Could I provide them a voucher to use to purchase to the same value non alcoholic beverages or gift form a national supermarket chain?
Yes this can be provided as an alternative as it is a Christmas gift, it provides employees who do not drink alcohol with a £40 gift voucher for a national supermarket chain which they can exchange for an alternative non-alcoholic Christmas gift. Both the cases of wine and the non-cash gift voucher can be covered by the exemption. Please note cash and cash vouchers should not be treated as exempt from tax as trivial benefits, regardless of how small the cost.
How often can I provide this £50 trivial gift to a staff member?
The legislation does not impose a limit on the number of trivial benefits that an employer can provide but caution should be made so as to not fall foul of the reward for services rule. It would be great if we provided £50 each day tax free, however there are limits!
I have decided to treat my staff for a job well done and for hitting their targets for the quarter, is it possible to give them each a bottle of Champagne to the value of less than £50?
This would be classed as a reward for services and so would be subject to tax and NIC. If however it was simply out of the generosity of your heart because “The sun is out, the sky is blue” and you are in a good mood and choose to surprise your staff then the champagne would be a trivial benefit.
Can director/shareholders also enjoy trivial benefits?
The answer is “Yes!” But HMRC aren’t silly and know what directors can be like, so the legislation imposes an annual cap of £300 on exempt trivial benefits provided to a director or office-holder of a close company (including benefits provided to members of their family or household).
If you have any question on any of the above or would like us to assist to review gifts and items and ensure that all is in order, we are happy to do so, just call us on 01273 326556 and one of the team will be happy to help.