It’s that time of year again when thoughts turn to Christmas.
As a business do you know what gifts you can give your staff without incurring tax or National Insurance (NI)?
Do you know what gifts to customers are allowable for tax?
What about the Christmas party; how can you avoid benefit in kind issues?
Gifts to staff – trivial benefits
In previous years an employer could only give trivial seasonal gifts to employees without incurring a tax or NI charge. This included things such as a turkey, a box of chocolates or a bottle of wine. It would not include a bottle of fine wine or a hamper. Any gifts which did not fit within this definition would be a benefit in kind and would generally be included on a PAYE Settlement Agreement (PSA) to avoid it being taxable on the employee.
From 6 April 2016 HMRC introduced a new statutory exemption for trivial benefits.
As long as a gift meets the following conditions it will not be a benefit in kind:
- The benefit is less than £50 (or average of £50 if it is provided to a group of employees and it is not possible to work out the cost for each individual)
- The benefit is not cash or a cash voucher
- There is no entitlement to the benefit as part of the employee’s contract
- The benefit is not provided in recognition of particular services provided by the employee
There is no cap on the number of such benefits that can be provided to employees in the year as long as each benefit meets the above conditions.
Where the employer is a close company (generally meaning fewer than 5 shareholders) and the benefit is to a director, the exemption is subject to an annual cap of £300.
If the gift exceeds £50 per head the whole amount will become taxable not just the bit above the £50.
Gifts to clients/customers
If you want to get tax relief on gifts that you make to your client/customers, they need to meet the following criteria:
- The cost per individual must be less than £50
- The gift must include your business name or logo in a prominent place eg calendar
- It cannot be food, drink or tobacco unless it is a sample of what you sell
If it meets these criteria HMRC are happy that it would fall under the definition of advertising and therefore be allowable for tax.
What conditions do you need to meet to ensure that a Christmas party for your employees is not taxable?
If the party is under £50 per head it is likely to fall within the trivial benefits exemption so will not be taxable.
What if you want to spend a bit more than £50 per head? There is a tax exemption for events as long as it meets the following conditions:
- It is an annual event eg Christmas or Summer party
- The event is open to all staff
- The cost of the event is less than £150 per head. This includes VAT and all costs that the company incurs such as transport and hotels.
If you hold more than one such event a year, the cost of all events must be under £150 per head to qualify. For example, if you have a Christmas party that is £140 per head and a summer barbecue that is £30 per head the Christmas party could qualify for the £150 per head exemption and the summer barbecue could qualify for the trivial benefit exemption.
If your Christmas party (or other annual event) exceeds £150 per head the whole amount will become taxable. To avoid the employees paying tax on the benefit the cost would need to be included on a PAYE Settlement Agreement (PSA). This would mean that you would pay the tax due by the employees and also National Insurance. At £160 per head it could end up costing you over £65 extra per head in tax and NI.
You can recover the VAT on employee entertaining but this does not include former employees or partners of employees. In additional, if any clients also attend the party you will have to pro-rate the VAT as this element will not be recoverable.
- Gifts to employees should be under £50 per head to be tax free.
- Gifts to customers should include an advert and are not food, drink or tobacco.
- The Christmas party should be under £150 per head and meet the other criteria to be tax free.