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Christmas doesn’t have to be taxing

Christmas is fast approaching and after a long trying year, we are all in the mood for a party. However, employers need to make sure that they keep to the rules when it comes to the tax treatment of providing a staff Christmas party and giving gifts to employees.

There is a tax exemption for employee entertaining if the event is all of the following:

  • an annual party or social function, such as a Christmas party or summer barbecue
  • it is open to all employees (or all employees based at one location)
  • the cost does not exceed £150 per head (inclusive of VAT)

HMRC have also confirmed that Virtual Christmas Parties are eligible for the annual function exemption.

The total cost of the party is the whole cost of the event, from the start to the end.  It includes food, drink, entertainment, taxis home, overnight accommodation, etc. The limit of £150 per head applies to all those attending the function, not just employees.  So, if employees are allowed to bring guests, the total cost should be divided by the total number of employees and guests.

Be aware that the £150 per head limit is an exemption not an allowance – go just a penny over the £150 and the full cost becomes taxable on the employee. The business can claim the cost of employee entertaining an allowable expense against taxable profits.

Input VAT on employee entertaining is generally recoverable.  However, employees for VAT purposes does not include partners/spouses of staff or former employees.  If guests are invited it will be necessary to apportion the relevant costs appropriately.

Christmas presents paid in cash to staff will be taxable as earnings in the normal way (subject to tax and national insurance). The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher.

The employer can give employees a seasonal present, such as a turkey, a bottle of wine, or a box of chocolates.  Provided the cost of the gift is ‘trivial’ – typically less than £50 ahead – the gift will usually not be taxable on the employee. Vouchers exchangeable for goods and services only (non-cash vouchers) are also potentially taxable but could be exempt under the trivial benefit rules. However, HMRC may not consider vouchers to be a trivial benefit.

Unfortunately, gifts to employees are not a tax-deductible expense for the business.

Don’t forget that directors of limited companies are also employees and so you can give yourself a gift at Christmas as the company is giving the gift and not you!  However, if your business does not have employees but just one of more directors, then the rules are different. The cost of providing entertainment only to directors or partners does not qualify for tax relief or VAT deduction.

In fact, VAT is confusing when it comes to Christmas gifts. You could, for example, claim input VAT on any gift which is purchased for a business purpose. However, keep in mind that if the gift is given to the recipient within a 12-month period, and totals no more than £50 (excluding VAT), and you have claimed input VAT, then you have to charge output VAT on the total cost of the gift.

Keep this in mind, as it might be easier not to claim the input VAT in the first place. This is one of the more confusing parts of picking Christmas gifts, and should be considered carefully

There are rules about gifts to customers and suppliers.  To get tax relief the gifts must carry a clear advertisement for the business (e.g. with branding or logo) which must be on the gift itself, not just the wrapping. They can’t be alcohol, food, drink, tobacco (unless they are your business) or vouchers. Non-promotional gifts and larger gifts are classed as entertaining and are not tax-deductible as an expense.