Christmas Tax Tips

by M Tombs
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Guidance on Christmas Parties and Gifts

Wit the year-end fast approaching this seems like a good time to remind everyone of the tax surrounding tax and VAT when it comes to Christmas parties and giving gifts to customers and staff.

Staff Christmas Parties

An employer can pay up to £150 per head per tax year for the provision of a Christmas party or similar annual function, with no liability to income tax arising on the employee. The cost per head must include the cost of the actual party or function (including room hire, food and drinks, entertainment and any other associated costs), any transport or accommodation provided for people and any value added tax charged whether or not it can be reclaimed.

The cost per head is calculated by dividing the total cost by the number of people actually attending. As long as the cost doesn’t exceed £150 per head there is no tax charge on the employee, but if the amount exceeds £150 the full cost is treated as a taxable benefit, not just the excess.

The employer can claim the full cost for employees and their partners as an allowable expense, but cannot reclaim VAT on expenses related to non-employees. Accordingly the VAT charge will need to be split.

All employees (or where applicable all those at a particular location) must be eligible to attend even though some may choose not to.

During the tax year the employer may hold a number of annual functions, e.g. a Summer Outing, a Christmas Party and a Barbecue. In such cases the cost per head of each function is added together and only those functions where the total cost per head is below £150 will be free of income tax. The functions that exceed the limit will be subject to a tax liability on the employee. For example, if the Summer Outing costs £90 per head, the Christmas Party costs £50 per head and the Barbecue £40 per head, although the total of all three functions exceeds £150 per head, two of the functions when aggregated are less than the limit and will not be subject to income tax. Only the Barbecue at £40 per head will be taxable. Where the employee takes a partner who is not an employee, the employee will suffer a benefit in kind charge of £80, i.e. £40 x 2.

The employer may enter into a settlement agreement with HM Revenue and Taxes through which the employer carries the cost of the income tax and national insurance charges payable.

Gifts to Employees

If an employer gives an employee a non-cash gift such as a bottle of wine or a Christmas hamper, then depending upon the value, a benefit in kind charge may arise on which the employee would be subject to tax. In practice the tax authorities accept that ‘trivial’ gifts may not be taxable. Although not formally defined, it is accepted that a gift such as a turkey given in the spirit of Christmas, or a bouquet of flowers to celebrate a marriage or birth is not part of any reward for services, and the benefit should be treated as trivial and not taxable.

As with the annual function, the employer can enter into a Pay As You Earn Settlement Agreement (PSA) with the Inland Revenue in order to pay the tax and national insurance liability on the employee’s behalf.

Gifts to Customers

Normally gifts for customers and clients are treated in the same manner as entertainment but gifts up to £50 carrying conspicuous advertisement can be treated as an allowable expense. However as with Christmas parties you need to be careful as if the gift costs more than £50 including gift wrap the whole amount will be disallowed, not just the excess.

Common examples of allowable gifts are diaries, flash-drives, pens and mouse mats. The advertisement should be on the actual gift itself, and not just on the wrapping.

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