It’s that time of year again, and your thoughts may be turning to seasonal staff parties and gifts for your employees. A question we are asked every year is, “what are the tax implications of these?”
Christmas parties or other social functions are exempt from tax and national insurance provided they:
- are open to all employees
- are annual, such as a Christmas party or summer barbeque
- cost less than £150 per person.
The exemption also applies to online or virtual parties.
What if your business has more than one location?
If your business has more than one location, an annual event open to all staff based at one location is still exempt. You can also put on separate parties for different departments so long as all employees can attend one of them.
What if you host more than one annual party?
The exemption will still apply if you host multiple annual events, provided the combined cost is less than £150 per person.
If an event costs less than £150 per head, you may be able to count the cost as exempt, but not if you have already used up the exemption on another event. You will have to report and pay the full cost of any additional event that goes over the £150 limit, even if it costs less than £150 on its own.
How is the £150 per head cost calculated?
When calculating the cost per head, you need to take into account all those attending, not just employees. For example, if it is a plus one event, the cost per head should be calculated by taking the total cost of the event and then dividing it by all the guests, i.e. including the plus ones and not just the employees.
Also, the cost includes not just the cost of the party itself but all related expenses such as taxis or overnight accommodation.
What happens if you exceed the £150 per person limit?
If the cost exceeds £150 per head, the liability to tax and national insurance is on the whole amount, not just the excess over £150.
You must report the cost on each employee’s P11D, and the employee will be liable to pay income tax on the benefit. You will have to pay Class 1A National Insurance on the full cost of the event. That is, unless you pay the grossed-up tax on the employee’s behalf under a PAYE Settlement Agreement (see below).
Is the cost of the party an allowable expense?
Unlike client entertaining, employee entertaining is an allowable expense – though of course it will be taxable on the employee unless an exemption applies.
What about VAT on parties?
Input tax on the cost of entertaining employees is generally recoverable. This only applies to the VAT on costs incurred for employees and not other guests such as partners of employees. If plus ones are invited, you will have to apportion the costs.
If an event is only for directors, partners or sole proprietors, the input tax will not have been incurred for business purposes and will not be recoverable.
Gifts to employees
You may wish to give your employees a seasonal gift, such as chocolates or a bottle of wine. These won’t be taxable provided they count as a ‘trivial benefit’. To be treated as a trivial benefit, all the following must apply:
- it costs you £50 or less to provide (this is £50 per benefit, not per tax year)
- it isn’t cash or a cash voucher
- it isn’t a reward for the employee’s work or performance
- it isn’t in the terms of the employee’s contract
If these criteria are not satisfied, the gift must be reported on the employee’s P11D, and you will need to deduct PAYE and Class 1 National Insurance through your payroll. If the cost of providing the benefit exceeds £50, the full amount is taxable, not just the excess over £50.
Example of gifts within the limit
During the tax year 2022-2023, an employer gives the employee a gift card on the birth of the employee’s child costing £35, a bottle of wine as a birthday gift costing £30 and a Christmas hamper costing £50. All three gifts are within the trivial benefit exemption.
What about VAT on gifts?
For VAT purposes, the problem is that the company has made a taxable supply to the employee, and so will need to account for output tax. It can claim the input tax. However, if the value of all gifts to the same employee in the twelve-month period ending with the date of the Christmas gift does not exceed £50, there is no need to account for the output tax and the input tax can be recovered in full.
PAYE Settlement Agreement (PSA)
An employer can apply to pay the grossed-up tax on an employee’s behalf under a PAYE Settlement Agreement.
A PSA is an agreement between an employer and HMRC that enables an employer to make a single annual payment to HMRC of any tax and National Insurance due on certain expenses and benefits provided to employees. These must be ‘minor’, ‘irregular’ or ‘impractical’ expenses or benefits and would include small gifts that are not trivial benefits.
Gifts for employees who are also directors and officers
Where the benefit is provided to an employee who is also a director or other officeholder of the company or a member of their family or household, the individual has an annual exempt amount of £300.
Although there is a cap only for directors and their relatives, if you make a lot of gifts regularly, you should make clear there is no link with services provided.
If you provide trivial benefits as part of a salary sacrifice arrangement, they will not be exempt. You will need to report on a P11D the higher of the salary sacrificed or the sum you paid for the trivial benefit.
What about gifts your employees receive from a client or customer?
If an employee receives a gift from a third party, then provided the value of the gift or gifts is less than £250, it should not be taxable. There are some other requirements too.
Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.