Christmas parties and staff gifts – a tax guide
With the festive period now approaching, we are often asked by employers about the tax treatment of providing a staff Christmas party or giving gifts to employees. Here is a quick reminder of the rules.
What is exempt?
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)
HMRC have recently confirmed that Virtual Christmas Parties will be eligible for 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 at 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
Christmas presents paid in cash to staff will be taxable as earnings in the normal way (subject to tax and national insurance). The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher.
Vouchers exchangeable for goods and services only (non-cash vouchers) are also taxable and must be reported on the employee’s form P11D. Class 1 national insurance will normally need to be deducted through the payroll.
Make sure you tell your accountant or the person who prepares the payroll, 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 gift is ‘trivial’ – typically less than £50 ahead – the gift will usually not be taxable.
If the gift 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 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.
Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.
More similar content
HMRC has launched nearly 13,000 investigations into alleged abuse of the government's coronavirus (COVID-19) financial support schemes. A freedom of information request revealed that, up to the end of March 2021, HMRC opened 12,828 investigations into alleged cases of...
Freeport operators will be able to take advantage of a zero rate of secondary national insurance contributions (NICs) for employees, the government has announced. The National Insurance Contributions Bill 2021, which legislates reliefs for those operating in...
Recent research conducted by Lumina Intelligence has found that the UK eating out market was expected to make a full recovery by the end of 2022. By the end of 2021 the UK eating out market was expected to grow by 33.4% to £63.6bn and expected to continue growing by...
The pandemic has forced the hospitality sector to close its doors for the best part of 12 months. These periods of closure have caused rising levels of debt and along with the pressure of increased costs have resulted in many businesses increasing their customer...
The UK government has confirmed that the new Plastic Packaging Tax (PPT) will come into force on 1 April 2022. The PPT will be charged at a rate of £200 per metric ton of chargeable plastic packaging. The aim of the tax The plastic packaging tax is designed to...
HMRC has confirmed that the fifth Self-employment Income Support Scheme (SEISS) grant covering the period May 2021 to September 2021 will open to claims from late July. To be eligible for the grant, an individual must be self-employed or a member of a partnership....
A report published by the Office of Tax Simplification (OTS) has recommended extending the deadline by which divorcing couples are able to claim spousal exemption on Capital Gains Tax when dividing their assets. Married couples or civil partners can transfer assets...
The Office of Tax Simplification (OTS) has recommended that the government double the Capital Gains Tax (CGT) reporting and payment deadline for disposals of UK residential property to 60 days. Rules introduced in April 2020 mean that a UK resident disposing of UK...
New tax obligations from April 2023 From 6 April 2023, significant changes will be made to the Self-Assessment reporting system for landlords with gross rental income above £10,000 per tax year. Bringing landlords within the scope of MTD is part of HMRC’s plan to...
New company car advisory fuel rates have been published which take effect from 1 June 2021. The rates have increased by 1p per mile for petrol cars and also for diesel cars with an engine size over 2000cc to reflect a slight increase in fuel prices. HMRC reviews the...