Tax implications of Christmas parties and gifts
With the Christmas party season under way, are you as an employer aware of the tax implications of providing a staff Christmas party or giving gifts to employees?
Client entertaining is generally not an allowable expense, however, the cost of employee entertaining is allowable, and therefore the cost of the staff Christmas party is deductible.
When having your staff Christmas party, in order to ensure the tax on the expense is fully tax deductible, you must ensure your staff party is an annual party, is open to all employees (or all employees based at one location) and the cost does not exceed £150 per head. The total cost includes food, drink, entertainment, taxis home, overnight accommodation and the VAT on any expenses. The £150 exemption per head applies to all those attending the function not just employees. So, if employees are allowed to bring guests, the total cost should be divided by the total number of employees and guests.
A taxable benefit in kind will arise if the £150 exemption is exceeded, the function is not open to all staff or it is not an annual function. It must be noted that the £150 per head is an exemption not an allowance, if you go one penny over the £150 the full cost becomes taxable. If the cost is more than £150 per head, the benefit must be reported on each employee’s form P11D and should this have been an event open to guests, their element will need reported also. For example cost is £170 per head, if an employee brought a guest the amount reported on their P11D will be £340. The employee will pay income 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.
Christmas presents paid in cash to staff will be taxable as earnings in the normal way and will be subject to tax and national insurance. The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher. Vouchers exchangeable for goods and services only (non-cash vouchers) are also taxable and must be reported on the employee’s form P11D but only if they exceed £50.
The employer may wish to give employees a seasonal present, such as a bottle of wine or a box of chocolates. Provided the cost of the gift is ‘trivial’ – costs less than £50 a head – the gift will usually not be taxable. If the gift exceeds this value, it will be taxable and it will need to be reported to HMRC on either a form P11D or through a PAYE Settlement Agreement.
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.
Make sure you tell your accountant or the person who prepares the payroll, so they can report the correct figures to HMRC.
Leanne Humphrey
