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The Festive Season can be tax efficient

If you are planning to throw a staff party or to give a gift to your staff, customers or suppliers as a ‘thank you’, then you need to be aware of the possible tax consequences and tax benefits.

Concessions on parties  

The basic rule is that all benefits provided to directors and employees are chargeable to tax (and national insurance). However the taxman will allow you to spend up to £150 per employee per year on a Christmas party or any other annual event. This includes the cost of the function (including VAT), transport and accommodation. To qualify for the exemption the party must be open to all employees, or all employees at a particular location.

Where the cost of all staff entertainment in a year is more than £150 per head, this will become a taxable benefit in kind on the employees and as an employer you will have to pay national insurance on this and report it on a P11D. If you have multiple functions in a year. Then at least one of them could be an exempt benefit as long as the cost per head of that particular function is less than £150 per head. All of the other functions in the year will be a taxable benefit in kind.

If employees’ husbands/wives/partners go to the party, the expenditure will be allowed for tax, as long as the total expenditure for the party, including guests, amounts to no more than £150 (including VAT) per employee attending.

As far as the VAT man is concerned any expenditure on persons who are not employees (spouses etc) is considered to be ‘entertainment’ and you cannot reclaim the VAT on that proportion of the expenditure. In such cases, you will have to split the bill according to how many people are employees and how many are guests. However, if partners pay to attend, all the VAT becomes recoverable as it is no longer classed as ‘entertainment’.

Staff gifts  

It is established practice that Christmas presents paid in cash to employees are almost invariably taxable as earnings. This view has been upheld by the courts on many occasions and can mean that a gift from a well-intentioned employer is worth less than the giver or the recipient expected. An alternative to a cash gift may be to give staff a seasonal gift such as a turkey or bottle of wine. In order to ensure that this is not a taxable gift, it is important to confirm that the trivial benefits in kind (BiK) rules apply.

The trivial BiKs apply where the BiK:

  • is not cash or a cash-voucher; and
  • costs £50 or less; and
  • is not provided as part of a salary sacrifice  or other contractual arrangement; and
  • is not provided in recognition of services performed by the employee as part of their employment, or in anticipation of such services.

Accordingly, gifts that cost under the £50 limit would qualify.

It is also possible to provide employees with a gift voucher (not a cash-voucher) where the value is £50 or less. It is important to remember that the gifts must not be provided in recognition of the employees’ services but merely as a gesture of goodwill at Christmas.

There is no longer a requirement for employers to report these trivial benefits on P11Ds or PAYE Settlement Agreements. However, if the Christmas gifts have a value in excess of £50 or cannot be counted as a trivial benefit then the gift must be reported on form P11D and Class 1A NICs will be payable on the value of the gift. 

Planning note  

There is an annual BiK cap of £300 that is applied to directors or other office-holders of close companies and to members of their families or households. The £300 annual cap does not apply to other employees. Please call if you would like our help in formulating your Christmas gifts scheme for 2017, and ensure that the benefits stay with your staff and not HMRC. 

Other gifts 

Clients and suppliers  

Other gifts are processed rather less generously and are treated as entertaining expenditure and, hence, are non deductible. The taxman will, however, allow you to give a business gift worth up to £50 to any person in any one year. 

The rules are as follows:

  • The gift has to be given freely. 
  • It has to be a business gift. It cannot be food or drink. It cannot be vouchers which could be exchanged for food and drink so store vouchers are out as well! 
  • It also has to carry a ‘conspicuous’ advertisement for your business.

Be careful about gifts that cost more than £50. In this case the taxman will disallow the whole amount, not just the amount over £50! From a VAT perspective, provided the gift does not exceed £50 (excluding VAT) during any rolling 12 month period, the VAT incurred is recoverable.