Written by Senior Tax Manager, Lekhrani Gya-Roopun
Before you succumb to the Christmas vibes and start opening your advent calendars, below are some helpful tax tips on how to keep the taxman’s paws off your Christmas spending.
Why let the taxman spoil the Christmas cheer!
Gifts and Trivial Benefits for staff
With Christmas being the ‘gift-giving’ season, employers may choose to send their employees a partridge over Christmas, or a non-cash John Lewis voucher, but if they do so, they will need to consider the tax implications.
From 6 April 2016, if an employer provides a benefit to its employees and certain conditions are satisfied, then the benefit is exempt from tax. Broadly, the gift should NOT be:
- Worth more than £50 (VAT inclusive)
- Cash or a cash voucher
- Part of any contractual obligation
- Provided in recognition of particular employment services/duties (or in anticipation of such services)
Please note, there are slightly different rules for directors of close companies, so please do come and chat to a member of the Gravita tax team about that in more detail.
If the above limits are exceeded, then the entire value of the gift is taxable and not just the excess.
Gifts not meeting these conditions are taxed in the normal way – via the P11D, PAYE Settlement Agreement (PSA) or taxed through the payroll.
Staff Christmas Parties
Staff entertainment is usually fully tax deductible against a business’ taxable profits, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to customer entertainment.
Where an employer provides a staff Christmas party, or any other social or sporting event which is open to all employees, the expenditure is allowable, but it is still necessary to establish that the expenditure is wholly and exclusively for the purpose of the business as there are certain cases of ‘excessive staff entertainment’.
Regardless of the above, it must be noted that a tax charge may arise on the employee on the employee’s share of the expense incurred by an employer in providing the social function. Again, there are exemptions where certain conditions are met. The party or similar social function must:
- Be open to all your employees
- Be annual, such as a Christmas party or summer barbecue
- Cost £150 or less per person
If all those conditions are met, then there is no requirement for the employer to report anything to HMRC or pay tax and national insurance contributions (NIC), and neither will there be any liability for the employees.
Similarly, to the limits on gifts, the £150 limit is not an allowance, and if the cost of the function per head exceeds £150 (including VAT, cost of transport/accommodation etc), then the full amount is subject to tax and NIC and not just the excess.
When calculating the cost per head, you need to consider the total cost and the total number of people (including non-employees) who attend the function to come to an average cost per person.
In cases where the employer provides two or more annual parties or functions, no charge arises in respect of the party, or parties, for which cost(s) per head do not exceed £150 in aggregate. Employers are not expected to keep a cumulative record for each employee for social events attended, but for each event the cost per head per employee should be calculated. If the total cost per head goes over £150 then whichever function(s) best utilise the £150 can be treated as exempt and the others will be taxable.
Covering the Tax
Without ruining the Christmas spirit by causing your employees to receive an unexpected tax bill, employers are able to pay the income tax and NIC on behalf of the employees that arise as a result of a gift or event by entering into a PAYE Settlement Agreement (PSA) with HMRC. Please note that whilst this is common practice and may feel like the right thing to do, because of the requirement to gross up the benefit received to include the tax and NIC not paid by the employees, this can be quite an expensive way to do things.
Of course, throwing a staff party or rewarding your staff with a gift or trivial benefit does not just have to be limited to December.
What next?
Now we are in the Christmas period, if you are planning your staff Christmas party or gifts to employees, please talk to the Gravita tax team to make sure you meet the conditions to do this as tax efficiently, for you and your employees, as possible.
