Want to treat your employees and clients this Christmas? If you are planning to play Santa and generate some additional goodwill, it is important to be aware that providing gifts and treats during the festive season can have serious consequences.
That’s why now is the perfect time to get up to date with the tax implications of your Christmas gifts and parties. Read on for a handy guide to tax and VAT-appropriate Yuletide giving for business-owners!
Treating your employees – minus the tax risks
A) Tax and Christmas business gifts and entertaining
Planning on treating your employees? Great. After all, employee entertainment is an allowable deduction against business profits for tax purposes, unless the only employees being entertained are directors/sole traders and their partners.
You also need to be clear about the intentions behind your Christmas do. This is because entertainment aimed at increasing staff morale is interpreted as being for the good of the business (except maybe the immediate morning after?!) and is allowed.
Run a family business? Watch out because entertaining only employees who are relatives could potentially lead to your expenditure being classified as a personal expense.
The bad news
Tax law dictates that any employee entertainment should give rise to an Income Tax charge on the employee on the VAT-inclusive cost of the entertainment and employer’s National Insurance at 13.8% on the employer. This of course would reduce any goodwill generated by the entertainment in the first place!
The good news
Fortunately, there are two ways to legitimately avoid this potential charge:
1) The Annual Exemption
This gives a VAT-inclusive allowance of £150 per employee for ‘annual parties’ (held annually and available to staff generally and not just directors) covering the whole cost of the party from transport to the venue to transport home!
The £150 limit applies to all those attending, which has an impact if guests of employees are invited. If you invite customers as well the costs will need to be apportioned as the customer element won’t be allowable as a deduction from profits for tax purposes.
If the cost per head exceeds £150, the whole amount (not just the excess), has to be reported on the employee’s p11d benefits form, leading to extra tax payable. Alternatively, you can address this by establishing a PAYE Settlement agreement.
2) A PAYE Settlement agreement (PSA)
A PSA is a voluntary arrangement that you can enter into with the HMRC which allows you, as the employer, to make one annual payment of the tax and National Insurance due on small or irregular taxable expenses or benefits or any that are impracticable to divide up between employees.
However, in most circumstances the simplest solution is probably to keep the cost under £150 per head. Please get in touch if you would like any more advice about setting up a PSA.
Wondering what to give your employees this festive season? Take a look at this list of examples of gifts with no PAYE or NI implications, according to HMRC guidance:
- Christmas gifts to employees
- ‘Seasonal’ gifts – HMRC gives the examples of a turkey, an ordinary bottle of wine or a box of chocolates. These Christmas treats are classified as ‘trivial’ for PAYE and NI purposes, so no further treatment is necessary.
- Other gifts to employees
- Tea & coffee – Make sure a vending machine is free as tokens or cash to use the machine attract a PAYE & NI charge.
- Small gifts at lifetime events such as retirement & work anniversaries
- Seasonal flu jabs – HMRC does not give any guidance on the impact of this strange ‘gift’ on staff morale!
However please note cash gifts & vouchers are taxable on the employee as with other earnings.
B) VAT and employee entertaining
Entertainment provided for employees is recognised by HMRC as wholly for business purposes and the associated input VAT is recoverable. But this is not the case if the only employees being entertained are directors/sole traders and their partners, where the input VAT is blocked.
For a festive event which welcomes both employees and non-employees, you need to use an apportionment method.
As a general rule, the cost of entertaining customers is not allowed as a deduction for income tax or corporation tax purposes. Any amounts paid out during the course of the accounts year will be added back in arriving at taxable profits.
Expenditure is defined as ‘business entertainment’ and the recovery of the associated input VAT is blocked if:
- Entertainment is provided (food, drink, accommodation, tickets)
- To persons who are not employees
- It is provided free.
Please note: ‘employees’ includes directors and their partners, but not non-employee shareholders.
Would you like further advice about giving at Christmas without taking business tax risks? Don’t hesitate to contact us.
We would like to wish all our clients and their employees a very merry festive season!