By Clare Austin, Tax Specialist at Baker Tilly Mooney Moore
2020 has been a year like no other and so it is hard to believe that the festive season is upon us once again.
Normally, Christmas is a time for staff parties and team lunches. However, as we are faced with continuously changing rules on social distancing and lockdowns both at a local and national level, holding a Christmas party this year could prove to be a challenge.
In light of this, you may look to other ways of rewarding staff during the festive season, such as gifts.
The tax treatment of gifts will depend on who will be receiving it – employees or customers.
A Christmas bonus for staff i.e. cash – is treated in the normal way and will be subject to tax and national insurance.
Gifts to employees such as hampers should be tax free for an employee provided that they fall within the ‘trivial benefit’ exemption. The exemption provides for an exemption from income tax for trivial benefits where the following conditions are met:
- The cost of the benefit does not exceed £50, including VAT;
- It is not cash or a cash voucher;
- It is not provided in recognition of past or future services performed by the employee in the course of their employment; and
- The employee is not entitled to the benefit as part of a contractual agreement (including salary sacrifice).
Where the employer is a ‘close’ company and the benefit is provided to a Director, the total value of trivial benefits they can receive in a tax year cannot exceed £300.
In terms of gifts from third parties, such as suppliers or customers, employees can receive vouchers for goods as long as they do not exceed £250, without being taxable. Other conditions include that the gift really must be a gift and not provided in recognition for services rendered, and it can’t be employer provided.
While gifts to employees are tax deductible for a business, gifts provided to third parties are not an allowable expense, unless the cost does not exceed £50 (per person, per period), bears the name/logo of the business and does not include food, drink or tobacco.
If you decide that a staff party is the way to go, provided the function is a once-a-year event then it will qualify as a tax-free benefit. It must be open to all your employees, not just the directors, and it can’t cost more than £150 per person (including VAT). The cost of the whole event will be an allowable expense for your business and you can reclaim input VAT incurred on the costs.
It is also important to remember that if you go over this amount, even by as little as £1, then none of it is exempt.
The £150 per person can cover any cost related to that function such as food, drink, transport and overnight accommodation.
If you hold more than one annual event in the year, all events will be exempt if the combined costs do not exceed the £150 and they are made available to all staff.
If there are non-employees attending the function i.e. customers or employees’ spouses, you are not entitled to deduct the VAT on these costs. Third party entertaining costs are also not an allowable business expense.
Still apprehensive about the tax implications of Christmas festivities? Contact Clare Austin or another member of the tax team on 028 9032 3466 to find out more