Christmas Parties and Gifts

At this time of year you may be looking forward to the annual staff Christmas Party but have you considered the tax and National Insurance implications of laying this on for your team?  After all, there’s nothing more festive than sitting down to examine the tax legislation before you book that Christmas Party!  Needless to say, the tax man may not be full of the Christmas spirit but there is a fairly generous exemption when it comes to events such as Christmas Parties and it is always worth recapping the rules.

Income Tax and National Insurance

There is an exemption from both Income Tax and National Insurance up to a cost of £150 per head.  The exemption applies to an annual party or similar annual event provided for the employees, e.g. a Christmas Party or Summer Barbecue.  There can be more than one event during the year and the exemption can still apply, as long as the combined cost of the events is no more than £150 per head.  The events also need to be open to all employees either within the firm as a whole or at a particular location or office of the firm.

It is worth clarifying that the £150 per head limit is not an allowance to be set against the cost if the cost exceeds £150, but rather if the cost per head exceeds that sum then the full cost is usually taxable on the individual as a benefit in kind and liable to Class 1A National Insurance.

Furthermore, the £150 limit is per head per attendee so if partners of staff members are invited and attend then the total cost of the event should be divided by the total number of attendees when considering the £150 limit.

VAT Position

When considering the total cost of the event for the purposes of Income Tax and National Insurance purposes above, it is the VAT inclusive cost of the party or event that must be considered.  However, there are further VAT complications which may need to be addressed when reclaiming VAT on the cost of a staff party.

As a general rule, any VAT incurred on the cost of entertaining non-staff, e.g. clients/customers, suppliers and other business contacts, is not reclaimable.  Therefore, it is only the element of the cost of the staff party which directly relates to employees, i.e.

excluding spouses/partners etc, on which VAT can be reclaimed.  Most businesses will therefore need to keep a list of attendees to the party to identify those who are staff members and those who are not in determining what proportion of the VAT can be reclaimed.  I am sure you will all agree that this adds to the fun of organising a Christmas Party!

Christmas Gifts

The same rules as mentioned above do not apply to any gifts provided to staff members, but a bottle of wine or even a turkey provided to staff members at Christmas may not be taxable or liable to National Insurance if H M Revenue and Customs (HMRC) agree that such a gift is “trivial”.  As is often the case with such wording in the legislation, there is no definition of trivial for these purposes, so it would be open to interpretation by HMRC, but generally the lower the value of the gift then the more likely it is that HMRC will accept it as trivial and thus not giving rise to any taxable benefit.

It is worth mentioning that in order to qualify as a trivial benefit and so be exempt from Income Tax and National Insurance, the gift cannot be a reward for the employee’s services and cannot be in the form of cash or vouchers etc, as those would be fully taxable and liable to National Insurance.

HMRC state in their guidance that a bottle of wine or box of chocolates could be treated as trivial benefits, but if the gift was a case of wine or a Christmas Hamper for example then it could be more unlikely that the exemption would apply.  Therefore if you are full of the festive spirit and lavish generous gifts on your staff, be aware that there may be tax implications.  Following in the footsteps of Scrooge might be simpler from a tax point of view!

The above is for general guidance only and no action should be taken without obtaining specific advice. May we take this opportunity to wish you all an enjoyable festive season