The festive season means employee gifts and staff parties aplenty for businesses across the United Kingdom. But what are the tax implications of spreading this sort of Christmas cheer?
With the festive season well and truly upon us, it’s essential that you have all the facts when it comes to dishing out presents and throwing the Christmas do. After all, it may be a little more complicated than you think. At this time of year, we’re often approached by employers who are keen to create a clearer picture of what these expenditures entail. That’s why we’ve put together a quick guide so that you can be armed with a full understanding of the tax implications of both employee gifts and staff parties.
First of all, let’s consider employee gifts.
Speaking in a general sense, employee gifts may or may not be taxable depending on the nature of what is being gifted. So, if you’re looking to play Santa this year but want to avoid additional tax costs, you’ll need to have your wits about you.
‘Tis the season to be…taxed on festive gifts?
You’ll be pleased to know that seasonal gifts are usually not taxable!
If you are keen to hand out wine, chocolates and other bits and bobs incurring costs that would be defined as ‘trivial’ - i.e. typically less than £50 per gift - then you can rest assured that such gifts will likely not be taxable.
However, if the gift exceeds this value, it will be taxable. In this instance, you must report it to HMRC by way of a P11D form or through a PSA.
Handing out cash bonuses or vouchers? If you’ll be handing out Christmas gifts to employees in the form of cash, you must bear in mind that the amount will be taxable as earnings in the typical sense. For cash gifts, the most straightforward course of action is to add the gift to the payroll in the month of December. It can then be taxed alongside the standard salary payment. Additionally, vouchers that are exchangeable for goods and services are also subject to tax and so must be reported on the employee’s P11D form, whilst Class 1 national insurance will be deducted through the payroll.
Now let’s take a look at staff parties.
Staff parties are tax-exempt, providing they comply with all of the following:
● The gathering is an annual party or social function, i.e. a Christmas party
● It is open to all employees, or all of the employees based at one of the company locations
● It is only open to employees, not to suppliers or customers
● The cost of the party does not exceed £150 per head, inclusive of VAT
What does the cost limit include?
The cost per head of £150, which is tax-exempt, is considered to be the total cost of the party, including any incidental transport or accommodation. This total is then divided by the number of people attending.
We understand, however, that it is often difficult to know ahead of time what the exact cost of the function will be. Luckily, there is a simple way to get around this.
In this case, it is advisable to book the party in the company name, and if you fear the £150 per head limit may be exceeded, the company director should be authorised to pay the bill personally and claim back up to £150 per head from the company. This, of course, would need to be supported by retained receipts.
If you are unsure about the tax implications of your event, we advise seeking the help of a professional accountant, such as ourselves here at One Two One Accounts.
Hosting two or more functions across the year?
If you’re hosting two or more functions in the tax year, you’ll need to be conscious of staying within the cost-per-head limit if you want to avoid being liable to pay tax. Multiple annual events will still be exempt, providing the combined cost of all events is no more than the £150 per head maximum.
If you’ve gone over the £150 exemption, you will need to report and pay tax on the full costs.
When are you obliged to report?
If the £150 per head limit is exceeded, or if your function is not open to all staff or is a one-off affair that does not occur annually, you will be required to report a taxable benefit in kind.
It’s important to bear in mind that this limit of £150 per head limit is not an allowance, it is an exemption. This means that surpassing this amount, even by a penny, would render the full cost taxable.
In this instance, the benefit must be reported on the P11D form of each employee. As the employer, you will then be liable to pay Class 1A national insurance, whilst your employees will pay income tax on the benefit. As an alternative arrangement, employers can put forward an application to pay the grossed-up tax by way of a PAYE Settlement Agreement.
How can One Two One Accounts lend a hand this festive season? Here at One Two One Accounts, our accountancy team has a wealth of specialist, in-depth tax knowledge. It’s our job to use our specialist knowledge to ensure you get the very best advice possible. If you have any queries or concerns regarding the festive finances of your business or are seeking more detailed and tailored advice, we’re here to help. For detailed advice and support with your accountancy, get in touch today.