Tax rules for staff gifts and Christmas parties
In the run up to the festive period, our clients often ask us about how to treat staff gifts and Christmas parties and what exemptions there are.
Based on the rules at the time of writing, we summarise the main points.
How are cash bonuses and cash vouchers taxed?
Staff Christmas rewards made in cash are treated as earnings in the same way as a salary and must be paid through the payroll as they are subject to Income Tax and National Insurance. Where gifts are made in vouchers which are exchangeable for cash these follow the same taxable treatment.
Can I give my staff non-cash vouchers
If rewarding staff with vouchers which are exchangeable for goods and services (not cash) please note that these are also taxable. However, the treatment differs in that this is reported as a taxable benefit on form P11D. Employee Class 1 National Insurance will normally need to be deducted through the payroll and the employer will pay Class 1A National Insurance when reporting the benefit on form P11D. An exemption exists for trivial benefits – please read on…
Are there any exemptions?
There is an exemption for what is known as ‘trivial benefits’
You don’t have to pay tax on a benefit provided to your employee if all of the following apply:
it cost you £50 or less to provide
it isn’t cash or a cash voucher
it isn’t a reward for their work or performance
it isn’t in the terms of their contract
You can’t receive trivial benefits worth more than £300 in total in any tax year if you are the director of a limited company run by 5 or fewer shareholders.
You might want to use the exemption to provide a £50 non-cash voucher, a bottle of wine or a box of chocolates etc. Where the gift cost more than £50 to provide the whole amount will taxable and it will need to be reported to HMRC on a form P11D.
What if my customers give gifts to my staff?
Some customers may like to surprise your staff with a bottle in the run up to Christmas. Gifts to staff from third parties will be received as a result of their employment. However, if the total cost of gifts to the employee does not exceed £250 in the tax year this is not taxable on the employee.
STAFF CHRISTMAS PARTIES
What is exempt from being treated as a taxable benefit?
There is an exemption for employee entertaining, but the following criteria need to be met for it to apply:
It must be an annual event, such as a Christmas party or summer barbecue
it is open to all your employees
the VAT inclusive cost must not exceed £150 per person
What does the cost per person include?
In working out the total cost, the entire cost of the event has to be taken into account. In addition to the cost of the food and drink all other related costs such as taxis and overnight accommodation need to be included.
The total cost of the event is divided by the number of people attending, even if some of those are not employees, such as former employees or staff guests.
What if I hold more than one annual event or the cost is more than £150 per head?
If you hold more than one annual event, the exemption will apply but only where the combined cost remains less than £150 per head.
If the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt, the others taxable.
Please note that the £150 is an exemption and not an allowance. Therefore, if the combined amount exceeds the exemption, the whole cost will become a taxable benefit, not just the amount which exceeds £150. This will give the employee a tax charge and the employer will need to report the benefit and pay Employer’s Class 1A National Insurance on the benefit.
Will I get tax relief on the cost of the event?
Unlike client entertaining, employee entertaining is an allowable expense, meaning the cost of the staff Christmas party is an allowable business expense where the event is open only to employees.
Can I recover the VAT on the staff party?
Any Input Tax incurred on employee entertainment can normally be recovered. An important point to note is that where some attendees are not employees, such as former employees or your staff’s guests, it will be necessary to apportion the relevant costs to reclaim only the part which relates to your staff.
VAT incurred on events open only to directors, partners, or sole proprietors cannot be recovered. This is because HMRC’s view is that input tax has not been incurred for business purposes.
If you have any questions, please do not hesitate to contact our director, Heather, and she will be happy to help. firstname.lastname@example.org