Christmas parties, employee gifts and benefits qualify for tax relief, provided they meet the criteria for annual events and employee entertaining.
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With Christmas nearly upon us again, we thought it would be helpful to outline the tax treatment of seasonal gifts and benefits to staff.
Tax relief for employee entertaining is available, but terms and conditions apply. The relief only applies to ‘annual parties’ available to all staff and is set at £150 per head. This figure is inclusive of VAT.
The primary exemption for staff parties is the annual event. To qualify as an annual event the party must meet the following criteria:
- the employer must have a similar event every year (eg, a Christmas party or summer BBQ);
- it must be open to all employees to attend; or
- it must be open to all employees at a particular location.
If the cost of qualifying parties exceeds £150 per head then all costs (not just those above £150 per head) are taxable as a benefit in kind and must be declared under P11d. It is important to note the cost of the party is the whole cost of the event, from the start to the end.
An example of a qualifying annual event
If the employer holds two annual events, such as a Christmas party costing £100 per head and a summer barbecue costing £60 per head, only the Christmas party will qualify for tax relief as the summer barbeque tips the cost over £150 per head.
It is important to note the £150 per head figure applies to all those attending the function, not just employees. This will come into play if employees are allowed to bring guests.
Implications for corporation tax
Generally, client entertaining isn’t allowable for corporation tax purposes. However, the cost of employee entertaining – as long as it is not incidental to the entertainment of others – is allowed to be deducted. If you invite clients or customers to your party, it is important to consider how to apportion the costs for corporation tax purposes.
Christmas gifts for employees paid for using cash will always be taxable along with other earnings. Non cash vouchers, above £50, that can be spent in either one or a number of different shops of the employee’s choice would be treated the same way. The employee has to pay tax on the full value of the voucher.
A seasonal gift of a turkey, a bottle of ordinary wine or a box of chocolates can be treated as trivial as long as the cost is reasonable. £50 a head is usually considered acceptable. If the value of the gift is more than this, it will be taxable and should be included on the employee’s P11D.
Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household), the total value of benefits that can be treated as exempt trivial benefits is capped at a total cost of £300 in the tax year. This is known as the annual exempt amount. Where the company provides benefits that it considers trivial, it will need to keep suitable records to demonstrate this amount has not been exceeded.
Whether you’re organising a Christmas party or purchasing employee gifts, Cobia Accounting specialises in providing accounting and taxation services to contractors and small businesses. To find out more, contact us today.