As the season of goodwill fast approaches, it is worth reminding ourselves of the tax rules which apply to seasonal gifts and entertainment to staff as a ‘thank you’ for all the hard work put in over the previous 12 months. Tax Tuesday looks at the rules around Christmas parties and gifts for staff.
It is fairly well known that a seasonal party with a cost per head of up to £150 (including VAT) is free from tax from the employee’s perspective while allowing the employer to deduct the cost for business tax purposes.
However, there are some less known points/opportunities to watch out for/be aware of:
1. To enjoy the tax exemption, the party must be available to staff generally or generally to those at a particular location. This does not mean all staff must attend.
2. The £150 limit is per head per tax year. If the cost per head over say two events in a tax year exceeds £150 in total, the whole amount of the event which brings the total over £150 becomes taxable.
So, take for instance, a business that puts on a summer barbeque at a cost of £75 per head and then later in the year a Christmas party at the cost of £76 a head.
The Christmas party will be taxable in full on those employees who attended it because it is this event which ‘pushes’ the total over £150 per head.
In a similar way, if the only event of the year is a Christmas party but the cost per head is £155, then the whole £155 will be a taxable benefit for the employee.
3. It is possible for employees to invite guests as it is the ‘per head’ costs which is important. Therefore, if staff bring their spouses/partners and overall, the cost per head if below £150 (even if the cost per ‘couple’ is more), there will be no taxable benefit.
4. Care should be taken in calculating the cost per head. It includes costs of transport and accommodation where applicable and remember, includes VAT also (even if the VAT on the cost relating to the employees is recoverable by the business through their VAT returns. Note that VAT on the cost element relating to employee guests/other third parties will not be recoverable).
It is possible to make a gift costing no more than £50 per head to staff. This might for instance, cover the costs of a bottle of wine given to each member of staff.
The business will be able to deduct the cost of the gift for business tax purposes and, depending on their VAT status, recover the VAT incurred on the cost of the gift.
A few points to watch are as follows. The gift:
1. cannot be cash or a cash voucher
2. is not part of contractual obligations (e.g. the employee’s contract).
3. Is not a reward or recognition of particular services performed/to be performed by the employee in the course of their employment.
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