Christmas parties and staff gifts – a tax guide

With the festive season approaching, we are often asked by our clients about the tax treatment of providing a staff Christmas party or giving gifts to employees.

Here’s a reminder of the rules.

Staff Parties

There is a tax exemption for employee entertaining if the event meets the following conditions:

  • It is an annual party or social function, such as a Christmas party or a summer barbeque.
  • it is open to all employees
  • The cost does not exceed £150 per head (Inclusive of VAT)

The total cost of the party is the entire cost of the event – including food, drink, transport, entertainment and overnight accommodation.

The £150 per head applies to all those attending the event, not just employees. If employees are allowed to bring guests, the total cost should be divided by the total number of employees and guests.

If there are multiple annual events, they will still be exempt as long as the combined cost of the events are no more than £150 per head. If this limited is exceeded or the function is not open to all staff, or is not an annual event, then a taxable benefit in kind will arise.

The £150 per head limit is an exemption, not an allowance – going just a penny over the £150 and the full cost becomes taxable.

The benefit must be reported on each employee’s form P11D. The employee will pay tax on the benefit and the employer will be charged Class 1A national insurance.

Alternatively, the employer can apply to pay the grossed-up tax through a PAYE Settlement Agreement (PSA).

Are costs tax-deductible?

Client entertaining is generally not an allowable expense for corporation tax purposes.  However, the cost of employee entertaining is an allowable expense, and therefore the cost of the staff Christmas party can be deducted.

VAT

VAT on employee entertaining is generally recoverable.  However, please note that the definition of employees for VAT purposes does not include partners/spouses of staff or former employees.  Therefore, if guests are invited it will be necessary to apportion the relevant costs appropriately.

Please also note that if an event is provided only for directors, partners, or sole proprietors, HMRC will not accept that input tax has been incurred for business purposes.

GIFTS TO EMPLOYEES

Cash bonuses & vouchers

Christmas presents which are paid in cash to staff are treated as taxable earnings in the normal way (subject to tax and national insurance), as are vouchers exchangeable for cash.

Non-cash vouchers (only exchangeable for goods and services) are also taxable and must be reported through the employee’s P11D. Class 1 National Insurance will usually be deducted through payroll.

Seasonal gifts

If an employer wishes to give employees a seasonal present, such as wine or chocolates, provided the cost is considered trivial (typically less that £50 a head) the gift is not usually taxable.

Third parties

Employees may receive gifts from third parties as a result of their employment.  As long as the gift does not exceed £250 in cost, it should not be taxable for the employee.

Tax Relief on Christmas Gifts to suppliers

Customer and staff Christmas gifts fall into the category of entertaining and as a general rule expenses, incurred by a business in providing entertainment or employee gifts, in connection with a business are not tax deductible. However, tax law does provide a number of exceptions to this where the cost of a gift can be deductible.

Where the gift incorporates a conspicuous advertisement for the business, then that may be tax deductible. For example, a branded golf umbrella, mousemat or diary would be ok. However, if the Christmas gifts consist of food, drink, tobacco, or any voucher that can be exchanged for goods, then that is not tax deductible, even if the festive chocolates are emblazoned with the business logo. There is a further restriction in that the cost of the gift cannot exceed £50.

There is a further relaxation of the rules where a company makes a gift of one of their products, and the item is given away during the ordinary course of that business, to advertise to the public generally. For example, if the business is a chocolatier, then it could make Christmas gifts of chocolates to the general public for promotional purposes and obtain a tax deduction for the cost of the chocolates.

Christmas gifts to charities would also be tax deductible.

How we can help

For more information on any of the matters in this article, please do not hesitate to contact us. Call 020 3915 8585 or email enquiries@lkassociates.co.uk.