In the run up to Christmas, employers laying on festive employee parties and perhaps even providing the odd Christmas gift should brush-up on HMRC’s rules or they could end up with an unexpected tax bill for them and their employees.
Yadvinder Rihal, employment tax manager at Blick Rothenberg, said: “With Christmas fast approaching, employers are getting into the spirit of the season for giving, but without proper thought it could prove to be a costly Christmas gift.”
Christmas Parties and Annual Social Functions
The tax allowance for annual social functions is £150 per head per year in total. This amount has been fixed since 2003 and includes several annual functions such as the Christmas party, summer party or annual golf day.
If a function takes the cost per head over £150, even by just 1p, tax is due on the total cost and not just for the excess over £150. Yadvinder said: “Some good news is that the employer can plan and choose which event triggers the excess charge, so they pick the lower costing event to treat as fully taxable.
“This allowance should go up with inflation, but HMRC has not increased it since 2003. With rising venue costs and employee expectations, pressure is on employers to be able to provide a great party at a reasonable cost.”
He added: “Where the costs are unavoidable and the party does end up costing more than £150 per head, employers are unlikely to want to be seen as Scrooge by asking employees to pay tax on the party… In this case, they could consider entering into a PAYE Settlement Agreement (PSA), which means that the employer pays the additional tax rather than the employee."
The VAT treatment contradicts the direct tax treatment. For staff parties, the VAT is fully recoverable whatever the cost per head. Thus, VAT on any staff events held across the year is recoverable in full.
However, VAT recovery is limited to staff members. If spouses or partners are invited to attend, the VAT is restricted to the number of employees.
Additionally, from April 2016 a statutory exemptions for trivial benefit has been introduced so that, providing that certain conditions are met and the benefit is less than £50 per event, this amount would be exempt from tax.
For example, if there are two annual functions, one costing £140 and the other £40 per head, the £40 per head event would be taxable as the total cost exceeds £150. However, with the new trivial benefit exemption it may now be possible to claim the £40 per head function as exempt.
Gifts to staff such as bottles of wine, a turkey or high street store gift vouchers are quite common at this time of the year. “Strictly speaking each of these is a taxable benefit, regardless of cost, and would need to be reported on forms P11D as a benefit,” said Yadvinder.
He added: “However, HMRC do not always like to be seen as Scrooge either and the introduction of the new trivial benefits exemption can apply. This includes items such as a bottle of wine, a box of chocolates, flowers or a seasonal gift provided the cost is less than £50.”
VAT on individual gifts of up to £50 is also recoverable.
“Where the cost of the gift is not trivial then it will need to be reported on P11D as a benefit. Should the employer decide that this is not practicable or appropriate given that this is a gesture of good will, they may pay the tax and NIC due in their PSA. In this case employers would be paying the tax on a grossed up basis i.e. paying tax on the tax,” he said.
Cash Gift or Bonus
A cash gift or a bonus given to staff at Christmas is always treated as normal pay and is subject to PAYE tax and NIC deductions through the payroll. This also applies to vouchers exchangeable for cash.
Third Party gifts
Christmas can be a time where suppliers or clients may give gifts to your employees or you may give gifts to the employees of your customers or clients.
Yadvinder said: “Employers have to report to HMRC details of the expenses and benefits provided to their employees by third parties, where the employer has arranged or facilitated their provision. Alternatively, where an employer makes a reciprocal agreement with a supplier to provide goods to the other's employees, each employer would be regarded as having arranged the provision for its own employees.”
He added: “Where there is no arrangement, the third party must give the same details to the employees as it would have to give if they were its own employees, but it does not have to give the information to HMRC unless specifically requested. The deadline for providing details is the same as for the submission of forms P11D.”
HMRC has stated that benefits such as corporate hospitality and small gifts costing the third party provider up to £250 per donor per tax year will not be caught by these obligations and therefore there should be no tax consequence for the employee.
For more information, please contact Yadvinder Rihal at firstname.lastname@example.org