What are the tax and VAT implications of the festive season?
While it may only be November, it’s fast approaching that time of year again! As we gear up to plan our Christmas work dos, or even start to distribute gifts to our employees and customers, it’s important to keep in mind the tax and VAT implications of the festive season…
Thinking about giving your employees or customers gifts this season? Don’t forget that HMRC still has its tax and VAT rules on giving gifts:
Generally, you will be able to reclaim the VAT incurred on purchasing the gifts. However, if in any 12-month period the total value of gifts to the same person exceeds £50 (excluding VAT), you will have to account for VAT on the total cost of all the gifts to that person.
In terms of gifts to staff you need to consider Income Tax and National Insurance implications.
Quite often, the ‘trivial benefits’ exemption can be used. The gift could be a bottle or two of wine, a gift voucher, a food hamper or even a festive meat pack. For a benefit to be trivial it must meet the following criteria:
- The cost of providing the benefit does not exceed £50.
- The benefit is not cash or a cash voucher.
- The benefit is not provided under salary sacrifice arrangements or any other contractual obligation.
- The benefit is not provided as a reward for services.
The trivial benefits exemption can apply to any other gifts provided to employees throughout the year where the conditions are met.
There are additional rules for directors and other office holders of close companies, who are subject to an annual cap of £300 for trivial benefits provided to them or to a member of their family. Although where the director’s or other office holder’s family is also an employee of the company, they will have their own £300 cap.
Where you wish to provide any gifts to staff above £50 in value, this can still be done without a taxable benefit arising for the employee. However, these would need to be included in a PAYE Settlement Agreement (PSA) where you, as the employer, would pay the tax due on the benefit, on a grossed-up basis, on the employee’s behalf.
Finally, don’t forget that for business tax relief purposes, gifts to staff will usually be a tax deductible expense for the business, whilst gifts to customers will not be.
VAT incurred on entertainment for employees (such as a Christmas party) is recoverable subject to usual conditions. HMRC accept that the expenditure is incurred in the course of business, e.g. to reward employees for good work or to maintain and improve staff morale.
However, the rules do get more complex when entertaining non-staff members or a mix of staff and non-staff members, and some/all the input VAT incurred may be irrecoverable.
In terms of Income Tax and NIC, HMRC also have an annual events exemption which, if the annual event falls under certain conditions, is exempt from tax arising from the benefit provided. The conditions are:
- It is an annual event.
- It is open to all employees.
- It costs less than £150 per head.
- The cost is inclusive of food/drink and transport if applicable.
This exemption can be spread over different events, such as a summer party and a Christmas party. But the cost per head of both events combined must not be over £150. Where this is the case, only one event will be eligible for the exemption, and the other will need to be reported through a PSA (the cheaper event obviously!).
If the business has more than one location, an annual event that’s open to all staff based at one location is still ‘open to all’. You can also put on separate parties for different departments if all the employees can attend at least one of them.
Similar to the rules for gifts, for business tax relief purposes, staff entertaining will usually be a tax deductible expense for the business, whilst customer entertaining will not be.
And finally, food!
Food is a notoriously tricky issue when it comes to VAT. Christmas hampers – which often contain a mix of standard-rated and zero-rated goods – are subject to the same VAT rules as when they are separate. To establish what VAT is payable, you will need to establish what elements of the hamper are standard rated.
Hampers bought in to be given to staff or customers fall under the business gift provisions. Therefore, VAT must be accounted for if the value of the hamper exceeds £50 (see above).
Finally, it is important to remember that all alcohol is standard rated, UNLESS it’s in food, such as a brandy-soaked Christmas pudding….
If you would like any further advice or information on VAT or tax issues at Christmas, get in touch with a member of our expert Tax team or call 0333 123 7171.