With the party season now in full swing, this month we have a timely reminder for how the taxmen view staff parties, gifts and entertaining.
Now contrary to what some people may believe, HM Revenue & Customs are not beyond the ability to enjoy a glass or two of good cheer at the festive time of year. As a result, there is an allowance for “annual staff events” which are open to all staff. For 2015/16 the allowance is set at £150 (including VAT) to cover all such events held in the year. Provided the total costs of all qualifying events in the current tax year are less than this level, no taxable benefit arises. However, exceed this threshold by a single pound and the whole amount of that event becomes taxable, not just the excess above £150. For example, if there were three qualifying staff events during the year, each one costing £60, the first two would be covered by the exemption and the third would be fully taxable. Also watch out that the event must be “annual”. A Christmas party held each year is clearly annual, but a one-off event may not qualify.
It is important to note that it is the whole cost of the event to the employer that is counted, not just the meal. Employers should therefore ensure that the costs of any overnight accommodation or taxis to and from the event are also included in your computations. Additionally, the £150 per head exemption applies to all those attending the event(s), not just the staff. This will be important if staff are allowed to bring guests.
The good cheer from HMRC continues in that staff entertaining at Christmas parties and other events is an allowable deduction against business profits. However, take care if you also allow clients to attend as client entertaining is not an allowable deduction against the business’s profits and you will have to then work out a suitable split. (If a spouse is also a client – it can happen – decide in what capacity are they attending first) If there are amounts to be taxed on the employees at the end of the year, then you may either include them on the P11D for the employee or, suitably grossed up, on a PAYE Settlement Agreement.
HMRC are not so helpful where staff gifts are concerned. If staff are given a seasonal gift by their employer – for example a Christmas turkey – provided that the cost is reasonable and the gift not excessive, HMRC will generally not seek to tax this. However, HMRC will also not specify what “reasonable” actually is and there can be variations. As a rough guide, the default amount of £50 per head or below is usually acceptable. You should note that gifts of cash or vouchers are always taxable no matter what the amount. This will apply whether the voucher (or cash) is provided direct by the employer or by another party on the employer’s behalf.
Staff may, of course, sometimes receive seasonal gifts and other “thank you’s” from clients or other third parties with whom they have had contact as part of their employment. Here HMRC are a little more generous. The value of these gifts may be up to £250 per head before becoming taxable on the employee – provided that it is a genuinely unsolicited and a genuine gift by the third party.
Christmas may also be the time to recognise the long service of a faithful employee. There is an additional relief for such rewards (although you are not restricted to Christmas time to use it). Where an employee has 20 or more years of service, a reward of up to £50 per year of service may be made free of PAYE. The reward must be of tangible assets or shares in the employer company and no other such long service reward should have been made to the same employee by the same employer in the previous ten years. (Again, cash and vouchers are excluded and are always fully taxable)
Gifts to clients are somewhat restrictive however, no matter how long they have been with you. Only gifts to customers that carry a conspicuous advert for your business will be deductible against your business profits – and then only if the cost per person per year is less than £50pa and the gift itself is not of food, drink, tobacco or gift vouchers.
Finally, the VAT treatment of the above broadly follows the deductibility of the expense for Income/corporation tax purposes in that input tax on staff entertaining is deductible, but client entertaining is not. There are a couple of slight differences however, in that for VAT purposes, the definition of staff does not include spouses or other guests, nor former employees and therefore careful apportionments may be required. Input tax on entertaining for the owners of the business (directors, sole traders or partners of a partnership) is also not allowable where the event was for them alone, but is allowable where they attended a function available to the staff generally.
So while there are a few minor complexities to be aware of, it is good to see that even the tax men can raise a (modest) glass or two at this festive time of year.
Merry Christmas all
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.