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As the giving season is on its way and many have already started present planning. We have answered your festive tax questions to help make gift giving a little more cost effective, as it seems the tax man isn’t as generous as Santa.

Christmas Parties:

Having an annual function any time of year is an allowable tax deduction for a business. Employers can spend up to £150 per head on annual staff events without it being treated as a taxable perk. But be careful, if you spend £151 per person the whole amount becomes a taxable benefit for the employee.

Client Entertaining:

If the event is predominantly for staff, you can invite clients without prejudicing the staff’s tax treatment as set out above.

Staff Gifting:

In previous year, the only gifts that have no tax implications are seasonal gifts such as a turkey, an ordinary bottle of wine or a box of chocolates. But from April 2016 non-cash vouchers can be gifted and employers can now benefit from the exemption.

Trivial benefits legislation came into action April 2016, making room for more benefits for staff and directors. For more information on the different benefits you can claim, contact us on 0845 054 8560.

When giving is also receiving…

Its worth noting that some changes have been made to the treatment of trivial benefits.

As part of some of the changes in the Finance Act, HMRC have issued a revision to some of the benefits that a director can receive.

They have revised it so that a non-cash benefit can be made to a director but not as a reward for services. Whether this is a meal, gift voucher or any other sort of goods.

This benefit can be of no greater value than £50 per time and the maximum for the year is £300.

An example could be, you go to John Lewis and purchase 6 x £50 gift vouchers. This complies with the two rules set above. This can be the case for all directors in the company so equivalent to £600 for a company with 2 directors.

This has two savings, one avoids you withdrawing funds and paying tax on the dividends. Secondly, the amounts paid will gain corporation tax relief at 19%.

 

Rewarding your staff

There are different ways employers can reward their staff and here, we discuss the tax implications of each approach.

Seemingly as quickly as it came, another year is galloping off into the distance and people’s minds are beginning to turn to the festive holidays. Employers will want to show their staff that the year’s hard work and dedication has not gone unnoticed.

There are many ways that an employer can go about rewarding their staff, from gifts and bonuses to parties. And while it may at first seem like the only factors that need to be factored in are whether or not your employees actually deserve to be rewarded and how much money you are willing to spend, as with most things there are tax obligations to consider too.

So what are the options and how do they weigh up against each other?

Christmas party

Everyone loves a good party, and a festive bonanza is a great way to ensure everyone feels rewarded for their work. The good news is that your employees won’t have to pay tax or national insurance (NI) for it. The bad news is that this only applies if you meet all of the following:

  • total cost does not exceed £150 per head, per year. This amount has to cover all events so if you have a summer party as well as a Christmas one, the £150 limit remains
  • this figure, which has remained the same since 2003, includes VAT and any other costs such as drinks, accommodation and transport
  • all staff working in the same location must be invited
  • if the cost exceeds £150 per head -even by just £1- it means the employee will be taxed on the whole amount, not just the additional £1.

If the cost per head exceeds £150, you can come to an arrangement with HMRC using a PAYE settlement agreement (PSA). This allows the employer to pay the tax and NI on behalf of the staff. PSAs are increasingly being used to encourage full employee participation in an event that may involve taxable benefits.

Christmas gifts

You’re allowed to give employees gifts (but not cash) up to the value of £50 per year. Seasonal gifts such as a turkey, an ordinary bottle of wine or a box of chocolates are deemed acceptable and will generally be treated as trivial benefits, and will be ignored by HMRC.

A turkey in a hamper, or less-ordinary wines may not be considered trivial and would need to be declared. This is often where the confusion begins: what about a brace of pheasants or a nut roast for vegetarians? Where is the dividing line between fine wine and ordinary wine?

How trivial is trivial?

The problem is that there is no actual definition of what HMRC means by ‘trivial’ and according its own guidance to staff (EIM21863) tax inspectors are asked to use their own judgment.

The HMRC guidance provides other examples of possible seasonal gifts, including the ultimate gift for the employee who has everything: seasonal flu immunisations.

But be warned. The flu jab is only treated as trivial if it is the routine seasonal flu jab, and does not apply to jabs against pandemic flu or other diseases.

Christmas bonuses

The tax treatment of the bonus depends on a number of factors. These include:

  • whether you give cash bonuses or goods (gifts) to an employee
  • if you give goods to an employee, whether or not they can be resold for cash
  • whether the employee is a director and how much they earn. Examples of goods that cannot be resold for cash include anything with your logo on it and very little else.
  • All other Christmas bonuses have to be reported.
  • The simplest form of Christmas bonus is to give someone who earns less than £8,500 a year goods that cannot be resold for cash. These are exempt and don’t have to be reported to HMRC.

Cash bonus

Any cash you give to employees as a Christmas bonus counts as earnings, so you’ll need to add the value to your employee’s other earnings deduct and pay PAYE tax and Class 1 NI through payroll.

Goods

If you give goods as Christmas gifts to employees, what you have to report and pay depends on:

  • whether or not they can be resold for cash
  • whether you give them to company directors or employees who earn more than £8,500 a year.
Expense Form What to pay
Goods with no resale value you give to employees earning £8,500 or more a year, unless these are counted as trivial benefits P11D Pay class 1A NI on the value of the benefit
Goods with no resale value you give to directors, unless these are counted as trivial benefits P11D Pay class 1A NI on the value of the benefit
Goods with cash resale value you give to employees earning less than £8,500 a year P9D Nothing
Goods with cash resale value you give to employees earning £8,500 or more a year P11D Pay class 1A NI on the value of the benefit
Goods with cash resale value you give to directors P11D Pay class 1A NI on the value of the benefit

The £8,500 threshold

At first glance it does appear to be on odd figure for a threshold, but the Office of Tax Simplification has provided an explanation.

When the benefits code was first introduced in 1948 a threshold, known as the “higher paid” employees threshold, was set at £2,000 of emoluments (including the value of the benefits). At this time the average earnings in the UK were £305 per annum, so the £2,000 level was 6.5 times the national average wage.

Since 1948 the threshold has been increased on three occasions to the current level of £8,500 set in 1979. If the £8,500 limit had increased in line with inflation it would have been £39,139 in May 2013.

In July 2015, it was announced that from 6 April 2016 the threshold will be abolished and all benefits will be taxable regardless of the employee’s total earnings.

Know your limits

With changing thresholds, lack of definition of trivial benefits, the tax treatment of directors, other employees and confusion about what is and isn’t a taxable benefit, it would be a good time to get in touch with us to find out more before the festivities start, rather than after the event.