HMRC has strict rules about staff entertaining, parties and gifts. Occasionally these rules can cause employers to inadvertently land their workforce with taxable benefits in kind, and possibly National Insurance contributions (NICs) to pay too.
There are two ways around this issue:
1. ensure the gifts and employee entertaining meet the rules, or
2. use a PAYE settlement agreement (PSA) to allow the employer to pay the PAYE and NIC due on the employee gifts and entertaining.
Employee entertaining, gifts, taxable awards, sales incentives and other items which would ordinarily be taxable on the employee can be included in a PSA as long as the item is irregular, isn’t cash and isn’t an ordinary benefit in kind. The application deadline for a PSA is 6 July after the end of the tax year. The tax and NIC due is payable by 19 October.
The tax and NIC due for a 20% taxpayer receiving a gift worth £50 would be £21.12. For a higher rate taxpayer it is £44.84. Another useful tip at this time of year is to check your P11D dispensation. HMRC will allow certain business expenses to go unreported, provided the business has a dispensation.
Here are the Christmas expenses rules.
The Christmas bonus, overtime or holiday pay are all taxable as salary through the payroll when paid. You can, with care, salary sacrifice a bonus, perhaps for a pension contribution.
Tax and NIC will be due on gift vouchers, through the P11D (tax) and payroll (NIC). A PSA can be used instead. Vouchers exchangeable for cash are effectively treated as extra salary. HMRC requires the Christmas gift to be trivial to be tax free, stating “An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts can be treated as trivial benefits.”
“If the gift extends beyond one of the items mentioned above, for example from a bottle or two to a case of wine, or from a turkey to a Christmas hamper, you will need to consider the contents and cost before being able to determine whether the benefit is trivial.”
If you would like to be a bit more creative, perhaps put a limit on the gift of £30 including VAT, but not in cash or vouchers. HMRC does not presently give a value for trivial benefits, but from 6th April 2016, employers will be able to provide a gift of up to £60 to employees. The number of these gifts that can be given to Directors, shareholders or members of their families will be capped at six in the year. Remember that the gifts must not be in recognition of good work or performance on the job.
The tax exemption for annual events, such as the Christmas party, is £150 per head, no matter the size of the business. The cost of the annual Christmas party includes VAT, transport and accommodation if the employer pays these, as well as the food, drink, venue and entertainment.
The Christmas party doesn’t have to be one big event. Each branch or department could throw their own party. Provided every employee is entitled to attend one party all the parties can be included in the events exemption.
If you have had another annual staff event, in the summer say, then this needs to be factored into the £150 limit. If the summer party cost £85 per head and the Christmas party comes to £70 per head then the Christmas party doesn’t qualify for the relief. The full cost of the party should be reported as a benefit in kind or on the PSA, not just the amount by which the overall £150 limit is exceeded.
Additional leave will be tax free. Be careful with Christmas drinks parties and other staff entertaining throughout the year. The PSA is usually the best place for these. Shares and share options need professional advice. You cannot get corporation tax relief for client entertaining, but unless lavish there should be no tax consequences for the employee. There are separate rules on third party and business gifts.