In the run up to the festive period we’re often asked how to treat staff gifts and Christmas parties, and what exemptions there are.
Here’s a summary of what you need to know…
EMPLOYEE GIFTS
How are cash bonuses taxed?
Staff Christmas rewards made in cash are treated as earnings in the same way as a salary and must be paid through the payroll as they are subject to Income Tax and National Insurance.
Can I give my staff non-cash vouchers
If rewarding staff with vouchers which are exchangeable for goods and services (not cash) please note that these are also taxable. However, the treatment differs in that this is reported as a taxable benefit on form P11D. Employee Class 1 National Insurance will normally need to be deducted through the payroll and the employer will pay Class 1A National Insurance when reporting the benefit on form P11D. An exemption exists for trivial benefits – please read on…
Are there any exemptions?
There is an exemption for what is known as ‘trivial benefits’.
The employer doesn’t have to deduct tax or National Insurance on a trivial benefit provided to an employee if all the following apply:
· it costs £50 or less (including VAT) to provide
· it isn’t cash or a cash voucher
· it isn’t a reward for their work or performance
· it isn’t in the terms of their contract
A director can’t receive trivial benefits worth more than a total of £300 in any tax year (i.e. six trivial benefits) if the limited company employer has five or fewer shareholders.
Even though the £50 limit on a single trivial benefit is inclusive of VAT, VAT registered businesses can generally still reclaim the VAT input tax.
Third party gifts to employees
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 on the employee.
STAFF CHRISTMAS PARTIES
HMRC allow limited tax relief against the cost of holding an ‘annual event’ for employees, which means no tax or national insurance contributions are payable on costs relating to annual social events organised for employees – providing certain conditions are met:
· There’s a limit of £150 per attendee (not just per employee, so employees partners or former employees for example, are included) per tax year and if this limit is breached, the employer must cover the tax and National Insurance for all the costs, not just the amount above the limit. The exemption considers all end-to-end costs for the event including VAT.
· For an event to be eligible for the exemption, it must be open to all employees to attend, or, alternatively, if there are several events (by location or office for example), all employees should be able to attend one.
What does the cost per person include?
In working out the £150 limit, the entire cost of the event has to be taken into account. In addition to the cost of the food and drink, all other related costs such as taxis and overnight accommodation need to be included.
What if I hold more than one annual event?
If you hold more than one annual event, the exemption only applies where the combined cost (of all events) remains less than £150 per head.
Is VAT reclaimable?
VAT input tax on employee entertaining is generally reclaimable. However please note that the definition of employee for VAT does not extend to employees spouses and partners or former employees, for example. If guests are invited it is necessary to apportion the VAT and only reclaim on the employee element.
Please also note that for VAT purposes, if an event is provided only for directors, partners or sole proprietors, HMRC’s view is that the VAT is not for business purposes and is not reclaimable.