As the festive season approaches, many businesses plan Christmas parties and gifts for their employees to celebrate the year's achievements and to spread holiday cheer. However, understanding the tax and VAT implications is essential to ensure compliance with HMRC regulations. Below, we outline the rules surrounding staff Christmas parties and gifts.

Staff Christmas parties: Tax and VAT rules

Tax-free allowances

Christmas parties and similar annual events can qualify for tax exemption under the following conditions:

  1. Cost per head: The event must cost £150 or less (including VAT) per person, covering all expenses such as venue hire, food, drinks, entertainment and accommodation where relevant.
  2. Annual nature: The event must be an annual occurrence, such as a Christmas party or summer gathering, and should be open to all employees.
  3. Employee inclusion: The exemption applies only to employees and their guests, not business associates or clients.

If these conditions are met, there is:

  • No tax or National Insurance contributions (NICs) for the employer or employee.
  • The employer can claim the cost as a business expense for corporation tax purposes.

Exceeding the £150 limit

  • If the cost exceeds £150 per person, the entire amount becomes taxable as a benefit-in-kind (BIK). For instance, a £160-per-head party generates a taxable benefit on the full £160.
  • Employers can settle the tax on behalf of employees using a PAYE Settlement Agreement (PSA).
    • VAT considerations
  • Employers can recover VAT on costs if the party is exclusively for employees.
  • If guests (non-employees) are included, only the VAT proportionate to employees is reclaimable.

Christmas gifts: Tax and VAT rules

Tax-free gifts

Gifts to employees can be tax-free if they qualify as trivial benefits under HMRC rules. To meet this exemption:

  1. The gift's cost must not exceed £50 (including VAT) per employee.*
  2. It must not be cash or a cash voucher.
  3. It must not be a reward for performance or part of the employee's contract.
  4. The gift must not be provided in exchange for work or services.

Examples of tax-free gifts include hampers, bottles of wine, chocolates or flowers.

*This £50 limit applies to the total cost of business gifts for an employee over a twelve-month period, not just at Christmas.

Exceeding the trivial benefits limit

  • Gifts exceeding £50 are treated as a taxable BIK, and employees may face tax and NIC liabilities.
  • Employers can opt to cover this tax via a PSA.

VAT considerations

  • VAT on gifts is generally reclaimable for business purposes, providing the gift(s) is less than £50.
  • If the gift's value exceeds £50 and it involves a taxable supply, VAT may need to be accounted for as output tax.

Conclusion

Christmas parties and gifts are a great way to reward employees and foster team spirit. By understanding the tax and VAT implications, businesses can celebrate without incurring unexpected liabilities.

If you have questions about your staff's Christmas party plans or how you would like to provide Christmas gifts to your staff, contact the team at DWilkinson&Company on 0113 320 0001 or email office@dwco.co.uk.