Christmas is fast approaching and it’s the time of year when many business owners are feeling generous. If you’re thinking of treating your team or clients to a meal, night out or a gift this Christmas, there are certain tax rules you should be aware of. Here we will outline the rules so that you and your employees don’t end up paying extra tax!
Christmas Gifts to Clients
At Christmas time, many business owners like to give their customers and clients gifts to show their appreciation. Gifts to clients are generally considered “entertaining” and you usually cannot claim tax relief or reclaim VAT unless the gifts comply with all of the following:
- The gift contains your businesses logo/advertising. E.g. Pens, diaries, notebooks, keyrings etc. with business branding
- All gifts given to any one client within the tax year amount to £50 or less.
- The gift is not a voucher, food, drink or tobacco.
Christmas Gifts to Employees
Christmas gifts to employees are generally considered staff entertaining or trivial benefits and the tax implications follow these rules:
If the gift has a cash value, for example is a voucher. The cash value will need to be reported on the recipient employees form P11D. This means that the employee will pay income tax on the cash value of the gift and the employer will pay NIC (National Insurance Contributions).
For the gift to be exempt from tax and national insurance, it would need to meet the rules for a Trivial Benefit. The rules for the Christmas gift to be classed as a trivial benefit are as follows:
- The benefit must not cost the employer more than £50. If the benefit costs more than £50, the whole amount will be taxable as a P11D benefit.
- It must not be given as a reward for an employee’s work or performance
- The employee must not be entitled to the benefit as part of their contract
- The trivial benefit must not be cash or a cash voucher
- If trivial benefits are given to the director of a close company, the benefit must not come to more than a combined total of £300 in the year (e.g. 6 x £50 gifts)
If you decide to give your employees a Christmas cash bonus, it will be taxed as additional salary and PAYE and Class 1 national insurance will need to be deducted.
Unfortunately, Christmas parties held for clients, suppliers or prospects count as entertaining and no tax relief can be claimed for these costs. VAT on business entertaining can also not be reclaimed. However, this is not the same for parties thrown for your team!
There is an annual deductible allowance for team parties of £150 per head. This allowance applies when these rules are followed:
- The event is an annual event
- The event is open for all employees to attend
- The total cost of events amount to no more than £150 per head, if it goes over this the full amount will be taxable on both employer and employee.
- If you hold more than one event in a year, the total of the events must not amount to over £150 per head. If the total cost of all events totals to more than £150, the whole cost of the event which took you over the £150 limit is taxable.
Note: Subcontractors are not classed as part of this team entertainment allowance!
Having a virtual team party this year?
Some people may not feel comfortable going back to face-to-face events just yet. Last year, HMRC took this into account, and if all conditions are met, in line with the regular rules regarding annual events, then up to £150 per person will continue to be allowed, tax free, for virtual parties.
This means you could organise an online event and send a hamper of food and drinks to your employees, and as long as all employees are invited to the event and the total is less than £150 per head, then all costs will be exempt from tax.
Whatever you decide to do, Christmas is a great opportunity to get your team together, get everyone engaged, and show that you appreciate everyone and all the work they have done over the past year. Get creative and have some fun!
Get in touch!
It can be tricky trying to get your head round what expenses you can and can’t claim tax relief on. If you’d like more information, or some help and advice on the tax implications of giving gifts this Christmas, get in touch! As accountants and Chartered Tax advisers, one of the team here at Rosslyn Associates can help with your queries, give us a call on 0131 445 1825 or email firstname.lastname@example.org