Tax Guide for Staff Parties and Employee Gifts

It’s that time of the year when many employers are planning parties and possibly even gifts for staff and clients. Navigating the complexities of Tax and VAT in these scenarios can be challenging. Fear not! Our experts have prepared this comprehensive ‘Tax Guide for Staff Parties and Employee Gifts’ to keep you covered!

Here goes!

 

Understanding the ‘Tax Guide for Staff Parties and Employee Gifts’ – Staff Parties

 

The cost of entertaining employees is deductible for corporation tax. That’s as long as it is available to all staff and not incidental to the entertainment of others.

If customers are invited to the event then the cost will need to apportioned between the employees and customer element. This is because customer entertainment is not deductible for corporation tax.

 

Staff Parties Exemption from Income Tax

 

There is an exemption from income tax and national insurance contributions on the benefit for employees. However, all of the following conditions need to be met for this to come into play. If all the conditions are not met the employer will be required to report to HMRC the benefit.

  • It is an annual party or social function, such as a Christmas party or a summer barbeque.
  • It is open to all employees. Employers who hold separate events for different departments can still satisfy this part of the exemption. This is provided that all employees have the option of attending at least one of them.
  • The cost does not exceed £150 per head (inclusive of VAT). The £150 per head is for all events throughout the year. So, if you have a summer barbeque and a Christmas party the total for both events must be less than £150 per head. If you do have separate events and the combined cost is over £150 then the limit is offset against the most expensive event, leaving the other as a fully taxable benefit.
 
The £150 Limit Per Head

 

The £150 limit per head is the total cost of the event. That includes food, drink, entertainment, travel, overnight accommodation etc. If the cost exceeds £150 per attendee, the first £150 will not be exempt, the whole cost will be subject to tax and NIC.

The good news though is that the £150 limit can also include spouses and partners of staff.

If the 3 above exemptions are not met, then the benefit must be reported via a P11D or there would need to be a PSA agreement in place. If the benefit needs to be reported via a P11D the employee will pay income tax on the benefit and the employer will need to pay Class 1A national insurance.

 

Claiming VAT on the cost of events

 

You can claim all the VAT on the cost of events provided it is for staff and not for client entertainment. If staff do bring partners/spouses then the VAT for their share of the cost cannot be claimed, the cost would need to be apportioned and VAT only claimed on the staff element. There is an option to charge any non-staff guests a reasonable amount which would allow all the input VAT to be claimed, as long as the main purpose of the event is for the entertainment of the staff.

For example, ABC Limited has 40 staff members invited to their Christmas party, they also invite 5 customers to the party. The cost of the party is £50 per head each plus VAT. ABC Limited decides to charge each of the customers £6.50 to attend.

The company will need to account for £5.42 output VAT (5 x £6.50 x 1/6) and pay this over to HMRC on their VAT return, but they would then be able to claim all the input VAT and no apportionment would be required for non-employees.

 

Gifts to Employees

 

Some employers may wish to give a gift to employees. If these are deemed trivial then they can be claimed as a business expense.

HMRC defines trivial gifts as:

  • Costing £50 or less (inclusive of VAT)
  • The gift isn’t cash or a cash voucher
  • The gift isn’t a reward for services
  • It is not provided under a salary sacrifice arrangement or any other contractual obligation

 

The Rules Around Gifts

 

These rules apply to any gifts provided throughout the year. Care needs to be taken though as HMRC can challenge anything provided regularly under the trivial benefit exemption. This is because it could create a expectation which would mean the exemption no longer applies.

There is a cap on trivial benefits for directors, office holders and their families of £300 per year.

If a gift is not classed as trivial it needs to be reported on a P11D and Class 1A NI would be need to be paid or be included in a PSA agreement.

You can reclaim VAT paid on costs of staff gifts but you will need to account for VAT when you gift (unless gift is as exempt or zero-rated, e.g. food/non-alcoholic drink) if its value exceeds £50, or the total value of gifts to the same person within the previous 12 months exceeds this. Keeping cost of gifts within £50 is the most tax (VAT) efficient option.

 
Cash Paid to Employees

 

Any cash gift or cash voucher is taxable as earnings and should be included in payroll.

 

Gifts to Customers

Non-promotional gifts to clients are not deductible against profits. They will be classed as client entertainment and no VAT can claimed on these.

If it is a small promotional gift, excluding food and drink, it could be classed as advertising. Advertising is tax deductible and VAT can be claimed. To be classed as advertising the gifts must clearly advertise the company with personalised branding. Examples would include pens, calendars, mugs etc.

 

Conclusion

 

So, there we have it! Our ‘Tax Guide for Staff Parties and Employee Gifts’ as seen by our experts! Hopefully this has served to provide clear insights into managing your tax obligations during festive occasions and gift-giving. But, if you still have any questions, please do give us a call! We’re always happy to see how we can help!

If you’d like to speak to one of our experts about your accounts, please call 01243 782 423, or email from our contact page and we will be in touch!

We also update our YouTube Channel regularly with new content, see here: Lewis Brownlee YouTube channel.