‘Tis the season to be jolly…and for HM Revenue & Customs (HMRC) to tax your good cheer. Tax treatment of seasonal gifts and benefits to staff need to be considered when rewarding your team.
The Christmas Party
Social functions for employees, including the Christmas party qualify for a tax exemption, providing they adhere to certain terms and conditions. Only ‘annual parties’ available to all staff qualify for the exemption, and the limit is set to £150 per head, including VAT.
If the cost of qualifying parties exceeds £150 per head, then the entire cost (not just that above £150) is taxable as benefit in kind. It important to note that it is the entire cost of the party from the start to the end that is considered and has to be within £150. This therefore includes taxis to and from the event, as well as the cost of any overnight accommodation.
The £150 limit occurs to all those attending the event, not just the employees. Therefore, this needs to be considered when employees are allowed to bring guests.
Normally, client entertaining for the purposes of corporation tax is not allowable. The cost of employee entertaining is deductible, providing it is not secondary to the entertainment of others. Clients and customers can attend the party, but the costs apportioned to them need to be separated for tax purposes.
Although input tax on entertaining is generally not recoverable, employee entertaining is. However, for VAT purposes the definition of employee entertaining does not include partners of existing staff, or former employees. Therefore, the relevant costs need to be separated for VAT purposes if the party includes guests.
If entertainment is provided where only the partners, directors or sole proprietors attend, then HMRC does not accept that input tax has been incurred for business purposes. However, if other staff members are in attendance, then the VAT on the cost of them attending can be recoverable.
Cash, as way of a Christmas gift to employees, is taxable along with other earnings. This also applies to vouchers that can be spent in a shop of the employee’s choice (within the voucher’s limitations); tax on the full value of the voucher has to be paid by the employee.
We hope that you enjoy your Christmas celebrations, and that Scrooge does not put a dampener on your Christmas cheer!