Q&A: Tax rules on staff Christmas parties and customer gifts
Small business tax expert Robert Leggett of chartered accountants Ensors explains what allowances your small business can claim
Christmas is the perfect time to show your people how much you appreciate their contribution over the year, as well as showing your appreciation to valued customers, but what tax rules should you be aware of? Corporate and business tax partner, Robert Leggett, of chartered accountants Ensors, answers some key questions.
What are the tax rules as regards staff parties?
Robert Leggett (RL): “HMRC isn’t known for its generosity, so it would normally consider any sort of staff entertaining as a benefit-in-kind, upon which tax is payable. However, if you hold an annual function or party, such as a Christmas party, which is open to all staff, a cost of up to £150 per head is exempt from tax. It doesn’t have to be a Christmas party, just a social event, which would normally be expected to happen each year, so it could be a summer barbecue instead. If you hold two staff social events each year, provided the total cost is less than £150 per head, both are exempt.”
What can be included in that £150?
RL: “It can be food, drink, accommodation and travel, as long as you don’t exceed the £150 limit. This includes VAT, however, it may not be possible to recover the VAT in full.”
What about partners of staff members?
RL: “While the event must be primarily for entertaining staff, and must be open to all of them, it can be extended to their partners, so a further £150 is exempt from tax. Where a business has more than one location or staff are split into separate departments, each can have their own function, as long as it’s available to all staff at the site or in that department.”
What if the cost is more than £150 per head?
RL: “The £150 per head is a limit – not an allowance – so even if the cost is £151 per head, the whole benefit then becomes taxable. Where there is more than one event in the year and the total cost of all events exceeds £150, you can choose which events are covered by the exemption. For example, if there were three staff events during the year, each one costing £60, two would be covered by the exemption and the third would be fully taxable as a benefit-in-kind. Where a taxable benefit arises, you can choose to pay the tax and National Insurance arising on behalf of your employees, using a PAYE Settlement Agreement (PSA).”
What are the tax rules if I choose to pay my staff a cash bonus at Christmas?
RL: “As a general rule, any payments of cash or equivalent to staff will be taxable in full, and should be put through your PAYE system. So, a Christmas bonus will be subject to income tax and National Insurance in the same way as normal wages. Employer’s National Insurance will also be payable.”
Are all things taxable when given as an end of year reward to staff?
RL: “Anything that’s equivalent to cash, such as vouchers, will be taxable. Now there’s a new exemption for trivial benefits, but to qualify these must not be in cash or given as a reward for work done. They must not cost more than £50 for each staff member on each occasion, so they could perhaps extend to a goodwill gift of something like a turkey at Christmas, plus a box of chocolates at Easter. There’s an extra restriction on the amount of trivial gifts for directors of most privately owned companies.”
What are the tax rules as regards sending out Christmas cards to customers and suppliers?
RL: “Christmas cards would not be treated in the same way as entertaining, because this normally only includes eating, drinking and other hospitality. However, if you are sending gifts with any value, these are not tax deductible unless they carry a conspicuous advertisement for the donor, cost less than £50 and are not food, drink or tobacco.”