This year, you may choose to provide your staff with a hamper or a voucher for food or drink. In this case, the trivial benefits rule could cover such a gift. A trivial benefit is something small. It doesn't require a contract and costs less than £50 /including VAT/ per employee. It is also not performance-based. But be careful. If the cost exceeds £50, the tax applies to the entire benefit, not just the excess. If it is impossible to establish the individual cost for each employee, we can use an average. Trivial benefits are capped at £300 per tax year for directors, officeholders, and their families. That is right: You can gift yourself £300 per year if you are the company owner.
Rewarding staff with a Christmas treat may not be joyfully received if it comes with a tax implication. For example, the tax authorities would treat a gift of cash just like normal earnings and tax it in the same way.
HMRC does not tax festive gifts to staff, such as the ‘usual’ bottle of wine or a box of chocolates, as long as the cost is less than £50 a head (a trivial benefit). Gifts worth more than that, such as a pricey hamper or a luxury bottle of whiskey, may have to be reported on the employee’s P11D, or included in a PSA.
There must also be no contractual entitlement to a gift, and it cannot be given as a reward for performance. Please note that just because a gift is given each year, or is given to all staff doesn’t mean the employee has a contractual right to it.
Cash vouchers given to staff are taxable in full in the same way as ordinary earnings. You must account for the face value of the voucher via PAYE, regardless of the cost to the comany.
Non-cash vouchers can benefit 'from the trivial benefit rules, so employees could be given an Amazon voucher, for example, that does not exceed the £50 limit.
Christmas is often the time for big office parties and is an excellent way of making staff feel valued. Provided the party meets certain rules, they are free of tax and National Insurance Contributions (NICs).
The party should be inclusive of all employees. The employer's cost should not exceed £150 per person, which covers VAT, travel, and accommodation expenses. The total cost of the party is determined by dividing the overall expense by the number of attendees, including non-employees.
If it is not practical to hold a single function, the £150 per head exemption can apply across separate offices and departments. For employers with more than one locations, an annual event that is open to all staff based at one office still counts as exempt. Businesses can also put on separate parties for different departments, as long as all employees can attend one of them.
Having too much of a good time, however, may prove expensive. An open bar is best to be avoided, or at least closed at some stage in the evening. If the cost per head goes over £150 (even by just a penny) then the whole amount is taxable – not just the excess over £150. This would then have to be reported on the employee's P11D, or the employer could choose to pay the grossed-up tax under a PAYE Settlement Agreement (PSA) in order to retain the goodwill of staff.
Where the cost is less than £150 per head, the unused element could be spent on another staff party (perhaps a BBQ in the Summer) – provided the annual total spend does not exceed the £150 per head limit. If you go over the limit, you can choose the lower-costing event as taxable.
Alternatively, if the expense surpasses £150 per person, employers might request employees to contribute a minor amount to reduce the cost below the threshold.
Holding a virtual event via Zoom for example is an alternative to a physical party. It is preferred for remote working staff. It's important to highlight that to maintain the yearly exemption, some form of attendance record must be kept.
You can still book some entertainment, or there might even be a Christmas quiz. Alongside this online gathering, qualifying for the annual exemption could be the provision of up to £50 worth of vouchers or a gift, which would be covered by the trivial benefits exemption. Both exemptions could be claimed in this case. It's crucial to maintain accurate records of all expenses and participation to ensure that the exemption thresholds are not surpassed.
HMRC has verified that:
"Tax exemption applies to annual parties or events for employees where the cost does not exceed £150 per person. Given the unique circumstances of the pandemic, festive events for staff will be different, so we're affirming today that this exemption will extend to the expenses related to virtual parties - including gifts to be used at the party."
Cash gifts during Christmas from individuals other than the employer are considered taxable income if:
Generally, such a gift should not be taxable if the donor's cost in a tax year does not surpass £250 (inclusive of VAT, regardless of whether it can be reclaimed).
Employers are not permitted to claim a tax deduction for entertaining clients. When clients are present at your Christmas party, the expenses must be divided between them and the employees for tax considerations.
Business presents to clients are typically not allowed as a deduction against earnings – they are handled in the same manner as business entertainment. However, there are some exceptions:
Christmas cards to clients and potential clients are considered an expense and are tax deductible, if they carry a clear advertisement for the business sending them.
When rewarding third parties, such as clients or suppliers, with gifts that are taxable, a Taxed Award Scheme (TAS) can be set up to deal with any tax and NICs. No employee NICs are due on gifts to third parties made under a TAS.
VAT for customer entertainment cannot be reclaimed; however, it is refundable for staff entertainment. The term 'employees' for VAT considerations does not include partners of current employees or ex-employees.
If the entertainment is only for directors, partners, or sole proprietors, you usually can't get back VAT. However, there is an exception if they go to the party with other employees.
