Expert Guidance on Treating Employee Christmas Perks for Taxation Purposes
With Christmas fast approaching, it is that time of year when employers might wish to treat employees to Christmas parties, gifts and bonuses to show their appreciation. But how can employers make sure that their festive generosity doesn’t come with a large tax bill attached? Tax preparation specialist and Managing Director of DSR Tax Claims Ltd, David Redfern, explains how employers should treat those festive extras they give to their employees for taxation purposes.
The Christmas party season is now in full swing and up and down the country, staff teams are taking a well-earned break from their daily routines. To ensure that the festivities don’t end up costing employees through additional tax and National Insurance deductions, there are a few HMRC conditions that need to be met. Staff events, including Christmas parties, need to cost less than £150 per head. Additionally they must be open to all employees and they must be an annual events – such as a Christmas party of summer barbecue. Parties can be held for separate departments or work locations, but all employees must be able to attend one of the work events. Multiple events over the course of a work year are acceptable as long as the total combined cost doesn’t exceed £150 per head.
HMRC considers the £150 to be an exemption, rather than an allowance. Redfern explains “In order for the event or events to be exempt for taxation purposes, meaning that they will not be counted as a taxable benefit for those attending, the total cost per attendee must not exceed £150 – this includes any VAT chargeable on the event and the cost of any transport or overnight accommodation if included. Should the event exceed this £150 limit the whole cost becomes taxable – not just the amount in excess of the limit. In addition, functions outside the scope of the HMRC conditions, such as events which cannot be describes as annual – a 10th anniversary for example – are not allowed to be treated under this exemption”. In order to calculate the cost per head, the total cost of the function should be divided by the number of attendees, including non-employees such as spouses and partners.
Many employees may be looking forward to a Christmas bonus at this time of year. However, Christmas bonuses are not considered to be exempt for taxation purposes. Redfern states “Cash bonuses are treated as normal income and should be added to the employee’s other earnings, with tax and National Insurance deducted as normal. This is also the same if the bonus comes in the form of a cash voucher or a voucher which is easily convertible to cash – as far as HMRC is concerned, it should be treated as though it was a cash bonus”. Bonuses should be treated the same way whether they are made by way of cash or through the usual salary arrangements.
When giving gifts to employees at Christmas, the tax arrangements will depend on the value of the gift. HMRC allows employers to give gifts to their staff as long as they can be described as ‘trivial benefits’. These gifts, such as a small hamper, a bottle of wine or a turkey, are exempt for taxation purposes providing the cost to the employer is less than £50 and the gift is not in the form of cash or a cash voucher. Redfern explains “HMRC allows these trivial gifts, from employer to employee, as long as they meet certain conditions. Not only must the value of the gift be seen as relatively little, but the gift cannot be contractual or as a reward for good work or performance. Where these conditions are met, the gift does not need to be reported to HMRC and there would be no income tax or National Insurance payable on the gift. If the gift comes from a third party, such as a customer or supplier, rather than the employer – providing that it doesn’t exceed £250 in value, it is also not taxable”.
Directors of close companies, which are classed as companies with five or fewer shareholders, cannot receive trivial benefits of more than £300 in any tax year. Any vouchers given as gifts which are for goods and services but are non-cash vouchers should be reported on the employee’s P11D as a taxable benefit.