By Emily Coltman ACA, Chief Accountant at FreeAgent
At this time of the year, many of us like to throw a Christmas party for employees and employees’ partners, and to give gifts to staff or business contacts.
What are the tax implications of that?
As an employer you can host a Christmas party for your employees and not have to report it as a benefit on form P11D in April, provided:
- The party is a regular annual event, not a one-off.
- All employees are invited.
- The cost per head to the business is under £150 for the whole event, including additional costs such as taxis home afterwards.
If your business is divided into departments or at different locations, you can give a separate party for staff in each department or on each site. The important thing is that everyone must have the chance to go to at least one party, or the criteria for “all employees are invited” won’t be met.
If the cost is more than £150 per head, then you have to report the full cost of the party for each employee — not the cost less £150. The £150 is a limit, not an exemption.
You can reclaim VAT on the cost of this party insofar as it relates to your employees.
Entertaining anyone other than employees
What happens if there are employees’ partners, customers, or subcontractors at the party?
These individuals do count as part of the number of people present when you’re working out whether the cost per head was more or less than £150.
If the party consists of providing food and drink (for example, a buffet supper, or a meal at a restaurant), then you can reclaim VAT on the part that related to your subcontract staff, as well as your employees. This doesn’t apply if the party is entertainment of a different kind. So if you take your team to the theatre, you can only reclaim VAT on tickets for employees — not for subcontract staff.
And you’ll never be able to reclaim VAT on the cost of entertaining employees’ partners or customers or anyone who’s not staff.
Gifts for employees
If you like to buy Christmas gifts for your team, the rules are different depending on whether you’re in business as a sole trader, partnership or limited company.
If you’re a sole trader, then as long as the gift is genuine, HMRC treat it as a personal gift from you as an individual to your team member and you don’t have to put it on form P11D.
If you’re in partnership or your business is a limited company, then the rules as to whether the gift is a taxable benefit depend on what the gift is.
For example, buying an employee “food or groceries”, which would include a Christmas hamper, should go on form P11D and you’ll pay Class 1A National Insurance on the value of that gift come July.
Did someone say something about Ebenezer Scrooge?
At least you can include the cost of gifts for employees in your accounts as a tax-deductible expense.
And you’ll be able to reclaim any VAT on gifts to employees — but you might well also have VAT to pay on them! More on that in a moment.
Gifts for non-employees
The cost of gifts for anyone other than an employee may be allowable for tax relief, if one of the following applies:
- You give something that your business makes or sells for free, which can include food, drink or tobacco (so if you are a cupcake maker and you give a box of Christmas cupcakes to a customer, that’s allowable for tax relief), or
- If your gift carries an advertisement for your business, and costs no more than £50 per accounting year per recipient, and isn’t a gift of food, drink or tobacco
Otherwise a gift would count as business entertaining, and you couldn’t claim tax relief on it.
You also wouldn’t be able to reclaim any input VAT you paid on the cost of buying a non-tax-deductible gift.
And there also might be VAT to pay on them, just to add insult to injury…
Output VAT on gifts
Paying for gifts is a cost, right, and so there wouldn’t be any output VAT to pay over to HMRC because of them?
I’m afraid not.
If you make gifts to the same person which cost less than £50 in total over a 12-month period, then you don’t have to account for output VAT on them.
But if your gifts cost over £50 to the same person in a period of 12 months — then you’ll have to work out the output VAT on those gifts and pay it over to HMRC on your VAT return.
This applies to gifts to both employees and non-employees.
So if your instinct at Christmas is to be generous and buy lavish gifts, be careful — HMRC might also be on your Christmas list!
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