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Staff Gifts and Christmas Celebrations – What are the Tax rules?

Posted on 9 Dec 2021 - What's trending?

Staff Christmas Party

As we approach the festive season, many businesses will be considering how they thank their staff and what are the tax consequences of doing so.

There are a whole host of tax rules employers need to be aware of when providing employees with the use of assets, making gifts and settling payments on their behalf. The relevant tax rules determine if there is tax payable, by whom, on what value and at what rate.

Where items fall within the Benefits in Kind regime the employee is subject to income tax on the value calculated and the employer pays Class 1A NIC, the benefit reportable via form P11D and P11D(b).  Where an item is to be treated as earnings it would be subject to income tax via through the payroll and subject to employees and employers Class 1 NIC. 

Naturally there are many rules to consider dependent on the nature of the item and advice should be sought.

What is perhaps most important for employers to be aware of at this time of year are the Trivial Benefit rules.

Staff Gifts - The Trivial Benefits Rule

What is a Trivial Benefit?

Since 6 April 2016 there has been a statutory exemption for what is defined as a trivial benefit.

To be clear, what falls within the exemption of being trivial is exempt from Income Tax and National Insurance for both the employer and the employee.

The cost of the gift is also a deductible expense for corporation tax / business tax purposes, for the employer.

For a gift to qualify as trivial, it must meet all of the following conditions:

  • It is not cash or a cash voucher
  • The VAT inclusive cost of the benefit does not exceed £50  
  • The benefit is not provided under a salary sacrifice or other arrangement; it isn’t in the terms of the employee’s contract
  • The benefit is not provided in recognition of past or future work or services performed

An example of gifts which may fall within this exemption would be a hamper or box of chocolates.

It is also worth noting that the trivial benefit exemption does not apply annually per employee, there is no limit on the number of trivial gifts that can be made to an individual employee during the year.  In addition, be aware that HMRC would challenge cases where they thought employers had tried to bring down the overall value of more expensive gifts by making cheaper gifts to reduce the average value to within the limit (for example Directors receiving expensive gifts, with other employees receiving a lower cost equivalent). Similarly in relation to gifts per employee, HMRC would not accept an employer trying to divide up a larger gift into small gifts to fit within the limit.

Is the tax exemption different for some companies, particularly family run companies?

It is important to note there is a specific rule for companies which are close companies, close being defined as 5 or fewer participators. This rule introduces an additional cap on the aggregate value of trivial benefits paid to directors, office holders and employees related to them, of £300 per tax year.

What if the value of the gift exceeds the £50 exemption?

If the gift exceeds £50 inclusive of VAT, then the full value of the gift is taxable.

As referred to, in determining the value that would be taxed and how it would be taxed, the various rules would need to be assessed.

Is it ok to provide cash or shop vouchers?

Christmas gifts paid in cash to staff will be taxable as earnings; subject to income tax and NIC.  The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher. These would fall foul of the conditions to meet the trivial benefit exemption.

Vouchers exchangeable for goods and services only (non-cash vouchers) are usually taxable and must be reported on the employee’s form P11D with Class 1 NIC being reported via the payroll however, importantly these do qualify as a trivial benefit. Therefore, provided such vouchers have a value of £50 or lower, no tax would be payable on them.

Do the same rules apply to gifts to Business Gifts such as clients, connections, suppliers?

It is important to note the rules vary from that outlined for employees. Broadly speaking these would not be tax deductible unless they carry a clear advertisement for the business and cost less than £50. The gift cannot be part of a series of gifts to the same person which come to more than £50 in that accounting period.  In addition, no tax deduction is allowed for corporation tax purposes if the gift is food, drink, tobacco or an exchangeable voucher.

What about gifts made to staff by third parties?

Employees may receive gifts from third parties as a result of their employment.  As long as the gift does not exceed £250 in cost, it should not be taxable for the employee.

There are however rules and reporting requirements which include the employer, with such gifts. As a result, such gifts and the notification of them by the member of staff to the employer, is often referenced in the staff handbook.

Christmas Cards

Christmas cards are a tax-deductible expense however, many companies opt to make charitable donations instead which can also provide corporation tax relief, provided conditions are met.

Staff Christmas Parties – are there any exemptions?

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 summer BBQ or Christmas party
  • it is open to all employees (or all employees based at one location)
  • the cost does not exceed £150 per head (inclusive of VAT) this includes the whole cost; food drink travel etc.

Client entertaining is generally not an allowable expense for corporation tax purposes. However, the cost of employee entertaining is an allowable expense, and therefore the cost of the staff Christmas party can be deducted for corporation tax purposes.

Note the trivial benefit exemption and exemption for staff entertainment are two separate set of rules and both can apply to the same employee.

 

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