As we enter the festive season, it is important to remember that there are potential tax implications of providing gifts to staff and hosting staff parties; therefore, you need to understand the tax rules to avoid unexpected tax bills in the new year!
The general principle is that anything provided to an employee “by reason of their employment”, including gifts, will be taxable on the employee and, depending on what it is, may also attract National Insurance liabilities.
However, two exemptions are particularly relevant at this time of year.
Trivial benefits
Trivial benefits are exempt from income tax and National Insurance where:
– The cost of providing the gift (total cost including VAT) does not exceed £50 per employee.
– The gift is not cash or a cash voucher. A non-cash gift voucher for a retail store should be fine as long as it is not exchangeable for cash.
– The gift is not contractual or provided in recognition of particular past or future services – a gift for Christmas should meet this requirement.
To note, this is an all-or-nothing exemption – if the cost of a gift exceeds £50, then the full value is taxable under the usual benefit-in-kind rules.
As well as gifts such as vouchers, turkey, or hampers (provided they cost less than £50, of course), the exemption can also be used to cover a staff meal or Christmas party costing under £50 per head.
If you are VAT registered, you can generally reclaim the VAT incurred on the purchase of the gifts in accordance with your partial exemption calculations. However, if in any 12-month period, the total value of gifts to any single person exceeds the above £50 limit, you will have to account for VAT on the total cost of all gifts given to that person.
Staff entertaining
Staff entertaining is exempt from income tax and National Insurance, provided the following criteria are met:
– The event is an annual function, for example, a Christmas party.
– It is open to all employees, or if you have multiple locations, it is open to all employees at the same location.
– The costs do not exceed £150 per head (inclusive of VAT). This is based on the number of people who attend the event, rather than the number you invite.
If you provide more than one annual event for staff, the cost of all events will be exempt, provided the total costs do not exceed £150 per head.
If the total costs exceed this level, the event that takes the total costs over this threshold will not be exempt, and the benefit-in-kind rules will apply.
If you think you won’t meet this exemption, please get in touch, as other potential exemptions may apply but are subject to different criteria.
VAT incurred on staff entertainment is recoverable by a VAT-registered business, subject to the usual conditions. However, the rules become more complex when this entertainment is extended to non-staff members or to a mix of staff and non-staff, and may result in input VAT becoming partially or wholly irrecoverable.
If you are not a VAT-registered business, then there are, of course, no VAT implications for any of the above.
If you have any questions about the tax implications of providing festive treats, please contact your usual Healthcare contact or email Rachelle Kilpin.
