With the festive period now approaching, we are often asked by employers about the tax treatment of providing a staff Christmas party or giving Christmas gifts to employees. Here is a quick reminder of the rules for the tax year 2023/24.
What Christmas Parties are exempt from tax?
There is a tax exemption for employee entertaining if the event is all of the following:
- an annual party or social function, such as a Christmas party or summer barbecue
- it is open to all employees (or all employees based at one location)
- the cost does not exceed £150 per head (inclusive of VAT)
In 2020, HMRC confirmed that Virtual Christmas Parties are eligible for the annual function exemption.
Calculating the cost
The total cost of the party is the whole cost of the event, from the start to the end. It includes food, drink, entertainment, taxis home, overnight accommodation, etc.
The limit of £150 per head applies to all those attending the function, not just employees. So, if employees are allowed to bring guests, the total cost should be divided by the total number of employees and guests.
Two or more functions
If there are multiple annual events, they will still be exempt as long as the combined cost is no more than £150 per head.
If you’ve already used up the £150 exemption on an event, you’ll have to report and pay tax on the full costs of any additional events, even if they cost less than £150 per head on their own.
A taxable benefit in kind will arise if either the limit is exceeded, or the function is not open to all staff or it is not an annual function.
Please be aware that the £150 per head limit is an exemption, not an allowance – go just a penny over the £150 and the full cost becomes taxable.
The benefit must be reported on each employee’s form P11D. The employee will pay income tax on the benefit, and the employer will be charged Class 1A national insurance.
Alternatively, the employer can apply to pay the grossed-up tax through a PAYE Settlement Agreement (PSA).
Are costs tax-deductible?
Client entertaining is generally not an allowable expense for corporation tax purposes. However, the cost of employee entertaining is an allowable expense, and therefore the cost of the staff Christmas party can be deducted.
Input tax on employee entertaining is generally recoverable. However, please note that the definition of employees for VAT purposes does not include partners/spouses of staff or former employees. Therefore, if guests are invited it will be necessary to apportion the relevant costs appropriately.
Please also note that if an event is provided only for directors, partners, or sole proprietors, HMRC will not accept that input tax has been incurred for business purposes.
GIFTS TO EMPLOYEES
Cash bonuses & vouchers
Employee Christmas gifts paid in cash will be taxable as earnings in the normal way (subject to tax and national insurance). The same tax treatment also applies to gift vouchers exchangeable for cash, with the employee taxed on the full value of the gift voucher.
Vouchers exchangeable for goods and services only (non-cash vouchers) are also typically taxable and must be reported on the employee’s form P11D. Class 1 national insurance will normally need to be deducted through the payroll. In certain circumstances, the gift of non-cash vouchers of up to £50 can be considered a ‘trivial’ benefit and exempt from both income tax and national insurance. This exemption can potentially apply to Christmas gifts to staff. Further details of the qualifying conditions can be found here.
Make sure you tell your accountant or the person who prepares the payroll about your Christmas gifts for staff, so they can report the correct figures to HMRC.
The employer may wish to give employees a seasonal present, such as a turkey, a bottle of wine, or a box of chocolates. Provided the cost of the Christmas staff gift is ‘trivial’ – typically less than £50 a head – the gift will usually not be taxable.
If the Christmas gift to staff exceeds this value, it will be taxable and it will need to be reported to HMRC on either a form P11D or through a PSA.
Employees may receive Christmas gifts from third parties as a result of their employment. As long as the gift does not exceed £250 in cost, it should not be taxable for the employee.
How we can help?
At Hawsons we have a dedicated team of tax specialists at our offices in Sheffield, Doncaster, and Northampton. Our experts provide proactive, well rounded, technically robust tax advice to businesses and individuals. If you are interested in what tax services Hawsons can offer you please visit our tax services webpage.
If you have any questions on how to treat your festive finances or would like more detailed advice, please do get in touch with us here at Hawsons.
We hope you enjoy the festive period!
More from our tax experts
You can find all of our latest tax articles and tax resources here.
If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.
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