With the festive season approaching, it is worth reminding employers that HMRC has a few presents to give out, since staff Christmas parties can be tax-free under rules which allow businesses to spend an annual tax-free amount of up to £150 (including VAT) per staff member on entertainment. The rules apply to any annual party or similar function, which must be open to staff generally or to workers at a particular location. The tax-free limit applies for a tax year, so if the employer puts on a summer event and a Christmas dinner together costing less than £150 a head, both will be tax-free for employees.
The cost could also include accommodation and transport home if the employer pays for these. Employees pouses or partners can also be invited as long as the cost per head stays under the limit. On top of this, the employer will also get tax relief on the total costs. Employers who exceed the £150 per head maximum can apply to HMRC to enter a PAYE Settlement Agreement (PSA) which allows the employer to cover the tax and national insurance contributions which the employee would otherwise have to pay. .
Seasonal presents to employees have to be declared and taxed, unless they are “trivial”. There’s no definition of what is trivial, but generally up to £50 a head is considered ok. Christmas Bonuses, just like any other bonus, have to go through the payroll and will, unfortunately attract tax and National Insurance in the usual way. Cash presents or shopping vouchers are treated likewise. Employers feeling generous could give an extra day off instead - there would be no tax, just a loss of productivity for one day, which for some businesses at this time of year may not amount to much. Small gifts to your employees from third parties won’t be taxable as long as they don’t exceed £250 in cost. I imagine that if your employees were getting more than that you may want to know why!
The vatman is not quite so generous - VAT is recoverable on staff entertaining expenditure but this does not extend to staff partners/spouses or to customers or suppliers,so input VAT will need to be apportioned.
Gifts to customers are only allowable as a tax deduction if:
The total cost of gifts to any one individual per annum does not exceed £50 and
- The gift bears a conspicuous advert for the business and
- The gift is not food, drink, tobacco or exchangeable vouchers
So, HMRC are generous but only up to a point, so watch the rules and have happy tax free time!
Merry Christmas from