Tax implications of Christmas Parties and gifts to employees and customers

So Halloween and Bonfire Night have been and gone and now our focus is on Christmas and the annual Christmas party.  In this week’s blog, we look at the tax implications of the staff Christmas party together with gifts to employees and customers.

Christmas Parties

The general rule is that the cost of staff entertaining is tax allowable, as long as it is not incidental to the entertaining of others.  If you were to invite suppliers or customers to attend too, careful consideration needs to be taken when apportioning the costs attributable to staff entertaining and to suppliers or customer entertaining as the latter is not tax allowable.

HM Revenue and Customs allow a tax exemption of £150 per employee for Christmas Parties.  So an employer can spend up to £150 per employee without having any tax burden on the employee or business whilst still claiming a deduction of the full amount for corporation tax.

There is no restriction to the size of business so this exemption even applies if you are the only employee or if the total employees are made up of you and your spouse!  What’s more, it stretches to guests meaning your spouse or partner can come along too – tax and NI free!

A Christmas party does not necessarily have to constitute a party, it could mean the form of a meal or a stay in a nice hotel.

It’s important though that care is taken when working out the total cost per head that it does stay under the £150 per head tax exemption.  If the cost per head exceeds this exemption by even £1, then the full amount becomes a benefit in kind for the employee and therefore tax and NI would be due.

The cost per head is considered to be the total cost of the party or function together with any incidental transport or accommodation provided divided by the number of people attending. 

It is sometimes hard to know in advance what the cost per head would actually be, especially if you have not factored in any after dinner drinks, but there is an easy way to avoid this. 

The event should be booked in the company name and if there is a danger of the £150 per head limit being exceeded, the director should be authorised to pay the bill personally and claim back only up to £150 per head from the company, which would need to be supported by receipts.

Some businesses may have more than one event a year such as a party at Christmas and a barbecue in summer.  The £150 per head allowance would need to cover both events.  If, for example the Christmas party cost £100 per head and the summer barbecue cost £60 per head, the total cost for the year would be £160.  In this case, the whole cost of the barbecue would be disallowable and would then become a taxable benefit.

The rules for staff parties are straight forward but it’s certainly prudent to think about the tax implications before the event!

Gifts to employees

The main rule is that the cost of a gift per employee should not exceed £50 and cannot be cash or a cash voucher.  Also, it cannot be a reward for an employee’s work or performance, nor can it be part of the terms of their contract. 

So if you are an employer thinking about giving your employees a Christmas gift such as a bottle of wine or box of chocolates for example, HM Revenue and Customs will not seek to tax these small gifts.

If you are an employer thinking about giving your employees a cash gift, the simplest solution is for employers is to give a cash gift which is added to payroll in the month of December and let it be taxed along side the normal salary payment.

Gifts to customers

Generally, any client entertaining is not allowable for tax purposes.  In addition, any gifts for clients and prospective clients are also not allowed.  The only exception is where the gift is small and advertises your company’s services.  This excludes food and drink.  The advert, such as the company logo must be on the item, not just the wrapping.  Examples or permissible gifts includes pens, diaries, mouse mats and umbrellas.

If you need any assistance or require any further information, please contact us on 0161 952 4244.

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