Tax update: Tax-free Christmas gifts and parties

With Christmas quickly approaching, we are playing Santa by providing some helpful tax reliefs that employers can take advantage of to help your business and employees enjoy the festivities without being left with a surprise tax bill at the end.

The annual Christmas party

As an annual event, the Christmas party is an allowable expense for you as the employer and is a tax-free benefit for the employees, as long as the below conditions are met:

• The total cost including transport and any incidental accommodation, is no more than £150 (including VAT) per head; and
• The party is open to all staff (or all staff at a particular location).

Employees’ partners can also be invited to the party but, if they are, all staff must be entitled to bring a partner. The £150 limit per head is for all the people attending (not just the employees). It is worth noting, however, that unless you are on the flat rate VAT scheme, you can only reclaim VAT on the costs relating to employees and not their partners.

The £150 threshold is not just limited to the Christmas party and can be spread across numerous events over the year, but the total cost must not exceed £150 per head, per year. For example, if there are three events held at a cost of £75, £80 and £60 per head each, the latter two can be claimed as exempt but the first event will be taxable in full (it is not possible to just tax the excess over £150).

One other catch to be aware of is that the £150 exemption is based on the number of people that actually attend the event. So, if you are at the top end of the allowance and you have a few last-minute dropouts which tips the cost to just over £150 per head, then the whole cost would be subject to tax and NIC and not just the amount in excess of the £150 cap.

If it is not feasible to get all of your employees together, another option, which has grown in popularity over the last couple of years for obvious reasons, would be to hold a virtual party. This could include sending a hamper to each employee with food, drink and other goodies to enjoy during the party, with the same annual limit of £150 applying.

Christmas gifts

If you are feeling extra generous and would like to give your employees a festive gift, then this can also be made tax-free in certain cases.

The gift cannot be too lavish as it must be classed as a ‘trivial benefit’ to be exempt from tax and NIC. Classic Christmas gifts such as a turkey, wine or chocolate would all be fine providing they do not exceed the specified limit of £50 per employee (including VAT). The gift cannot be cash or a cash voucher to qualify for the exemption, but a gift of high street vouchers up to the £50 limit is fine.

Another trap to be aware of is that the gift must not be provided as a reward for the employee’s work or performance, nor should it be a contractual benefit, to be eligible as a trivial benefit. It should also be noted that if your preference is to give your employees a cash Christmas bonus, then this will always be taxable on the employee.

For further advice, please contact katie.williams@hazlewoods.co.uk.