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Tax efficient ways for employers to be generous at Christmas
10 December 14 | By: Jas Jhooty
This week’s article explores how employers can take advantage of the tax breaks to entertain their staff tax-free at this festive time of the year.
The office Christmas party
There is a tax exemption for employee entertaining, but terms and conditions apply. The relief only applies to ‘annual parties’ available to all staff and is set at £150 per head.The party must be available to all employees generally or available generally to those at a particular location. The cost per head must include the cost of:
- the party or function (including cost of venue hire, entertainment, food, drinks and any other associated costs); and
- any transport or accommodation incidentally provided for persons attending (whether or not they are employees); and
- any Value Added Tax (VAT) on the expenses incurred in providing 1. or 2. above (whether or not this can be recovered from Customs & Excise).
If the £150 per head limit is exceeded the whole cost of the party becomes taxable and not just the excess. For this reason it is important to note that the amount of £150 per head applies to all those attending the function not just employees. This will come into play if employees are allowed to bring guests.
Generally input tax on entertaining is not recoverable; however any VAT costs relating to employee entertaining can be reclaimed. Please bear in mind that the definition of employees for VAT purposes does not include partners of existing staff, or former employees. Therefore if your party includes guests, you will need to apportion the relevant costs appropriately for VAT recovery.
Christmas presents paid in cash to employees will always be taxable along with other earnings. The same treatment also extends to vouchers that can be spent in either one or a number of different shops of the employee’s choice. The employee has to pay tax on the full value of the voucher.
If an employer wishes to give an employee a non-cash gift, e.g. a bottle of wine or a Christmas hamper, then depending upon the value, a benefit in kind charge may arise on which the employee would be subject to tax.
HMRC usually agrees that where an employer provides a small gift such as an arrangement of flowers in recognition of a particular event, e.g. an employee’s marriage or birth of a child, and is not part of any reward for services, the benefit should be treated as trivial. An employer may also provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable.
For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned.
Interaction with the Annual Parties exemption
Employers considering providing a more expensive gift to their staff (e.g. a hamper costing more than £50 including VAT) can take advantage of any balance of the £150 per head Annual parties exemption, as long as the gift is made available to the employee at around the same time as the Christmas party.
If costs become taxable
If you exceed the prescribed limits, tax & NIC becomes due and payable by the employee. Any taxable amounts should be reported on the employee’s P11D. Rather than upsetting employees most employers enter into a PAYE Settlement Agreement with HMRC to settle the tax and NIC on behalf of their employees.