With the festive period on the horizon, employers often ask about the tax treatment of providing a staff Christmas party or giving gifts to employees. Here is a quick summary of the rules.

Staff Parties

What is exempt?

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

• an annual social function of party, such as Christmas party or annual summer barbecue
• is open to all employees
• the cost does not exceed £150 per person (including VAT)

Calculating the cost

The total cost of an event is inclusive of all costs, from the start to the end. It includes food, drink, entertainment, transport costs, overnight accommodation etc.

The £150 limit applies to all those attending the function, not just the employees. Therefore, if employees can bring a guest, the total cost should be divided by the total number of employees and guests.

Two or more functions

If a company holds multiple annual events, all of those be tax exempt if the combined cost does not exceed the limit of £150 per person.

If the limit of £150 has been exceeded on an event, it will have to be reported and tax paid on the full costs of any following additional events, even if the cost is less than £150 per person.

Reporting obligations

A taxable benefit in kind will arise if:

• £150 limit is exceeded;
• function is not open to all staff or is not an annual event

Please note that £150 limit is an exemption not an allowance; if the costs exceed this limit, the full cost will be taxable.

The benefit must be reported on employee’s P11D form. The employee will pay income tax on the benefit, Class 1A national insurance will be chargeable on the employer.

Are the costs tax deductible?

Client entertainment is not an allowable expense for corporation tax purposes. Though the cost of employee entertaining is an allowable expense, therefore the costs of the staff Christmas party can be deducted.bbc

VAT

Value added tax on employee entertainment 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, relevant costs must be apportioned correctly. 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 paid in cash to employees will be deemed as earnings i.e. subject to tax and national insurance. The same tax treatment applies to any vouchers exchangeable for cash.

Vouchers exchangeable for goods and services are also taxable, those must be reported on the employees P11D form. Class 1 national insurance will usually have to be deducted through the payroll.

Accountants should be made aware of any vouchers and values gifted in order to avoid incorrect reporting to HMRC.

Seasonal gifts

The employer may wish to give employees a seasonal present such as Easter chocolates or bottle of wine. If the cost of the gift is ‘trivial’ (not exceeding £50 per person) it will not be taxable.

If the gifts exceed the value of £50 per person, it will need to be reported to HMRC.

Third parties

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

If you have any questions on how to treat your festive spending or would like more detailed advice, please do get in touch with us here at Specialist Taxation Services (Europe) Limited.

Wishing you a merry Christmas and a happy New Year!