Last minute shopping and planning is a Christmas tradition for many, so now would be a perfect time to remind bosses that there is a tax-free allowance for the provision of an annual party or other event for the benefit of staff and their partners. The present limit to tax relief is £150 per head. If this amount is exceeded, the full cost of the benefit is taxable not the excess over £150.
Where it’s not possible to calculate individual costs, an averaging process can be adopted. There are also other considerations that must be met to qualify for this relief. It may also be an idea to make sure there is evidence or a record of each person who attended the party in case your company is asked to demonstrate attendance.
Another way to benefit staff tax-free for Christmas is to consider making small gifts. You don’t have to pay tax on a benefit (gift) to your employee if all of the following apply:
- It costs you £50 or less to provide
- It isn’t cash or a cash voucher
- It isn’t a reward for their work or performance
- It isn’t in the terms of their contract
Gifts that fall into this category are known as a ‘trivial benefit’; and whilst they may be much more than trivial in substance, you don’t need to pay tax or National Insurance or let HMRC know you are making the gift.
Any gifts that do not meet this definition will likely be taxable. If you recover the input tax charged when you buy gifts for employees, and if the total value of gifts given to an employee in a tax year exceeds £50, then you will have to account for VAT on the total value of gifts provided. If this is the case, you may be advised to avoid recovering the VAT in the first place.
If your company has held other events such as functions or parties throughout the year it may mean your Christmas party will not be eligible for the tax exemption depending on who was invited and the amount spent.
Can my company do both?
These two tax exemptions can work hand in hand, meaning employees can attend a Virtual Christmas party (following the exemption rules) as well as receiving a gift under the trivial benefits exemption. The business should keep track of all expenses, no matter how minor, to ensure the limits are not exceeded.
A word of caution
Gifts to directors are treated in a similar fashion with one over-riding condition: a director cannot receive trivial gifts of more than £300 in total each tax year. This restriction only applies to the directors of “close companies”. A close company is a limited company with five or fewer shareholders.
Please also find information about
how tax is applied to business gifts.