How can I make my team’s festive treats tax efficient for my business?

Tax-efficient festive treats…

is exactly the ‘music’ your finance manager is happy to hear when it comes to rewarding your team this Christmas.

Staff entertaining, such as Christmas parties, are not classified as a benefit in kind for employees, subject to an exemption of £150 per head limit. Employees’ guests, are also taken into account when calculating the cost per head. The £150 exemption includes VAT, even if the employer can recover the VAT. Thanks to the pandemic, the HMRC guidance also states this applies to “online or virtual parties”.

It’s worth noting that all employees need to be invited. If your event is for particular departments or Heads of Divisions it does not qualify.

Importantly, this exemption applies to annual events. It does not apply to one-off events, such as anniversaries.

Don’t invite clients as client entertainment is not allowed for corporation or VAT purposes. Staff entertainment is tax deductible. It must be wholly and exclusively for the purposes of the trade and not merely incidental to entertainment provided for customers.

If you hold more than one annual staff event (e.g. summer party as well), then they’re still exempt. But the combined cost of the events must not be more than £150 per head.

Beware: the entire amount is chargeable if the cost for the (single) event exceeds £150 per head limit (not just the excess over £150)! This is because the cost per head is an exemption, as opposed to an allowance (e.g. like the personal allowance). Here are some useful examples, courtesy of HMRC:

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21691

Gifts – tax relief   

As a business owner you might consider giving your employees a Christmas present. There is an income tax exemption for trivial benefits costing not more than £50 each provided by employers (ITEPA 2003, ss 323A-323C), where certain conditions are met (see below).:

1. That the benefit is not cash or a ‘cash voucher’.
2. The cost of the benefit does not exceed £50 (including VAT)
3. The ‘benefit cost’ is not part of other contractual obligations or salary sacrifice arrangements.
4. That the benefit is not provided for the employee doing his/her job (or in anticipation of any service by the employee).
5. The ‘benefit cost’ of the benefit provided to the employee does not exceed the available exempt amount.

See also: https://www.gov.uk/expenses-and-benefits-trivial-benefits

Total annual exemption is £300

For condition E (see above) purposes (which applies to closely-controlled companies), the individual has an annual exemption amount of £300.

The rules say the benefit cost of ‘eligible’ benefits (within conditions A to D) provided during the tax year are added up, along with any eligible benefits earlier in the tax year allocated to the employee; this includes amounts given to the employees’ family (e.g. their children) or household, in calculating the ‘available exempt amount’.

If members of the employee’s family or household are also employees of the same close company they are each subject to their own annual cap of £300. See HMRC’s Employment Income Manual https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21870 for further details.

Directors’ rules

You can’t receive trivial benefits worth more than £300 in a tax year if you’re the director of a ‘close’ company. Close companies are limited companies that are run by 5 or fewer shareholders.

National Insurance Contribution (NIC) Exemptions

There are no Class 1A NICs (paid by Employers) on benefits which are exempt from income tax. This is good news! There is a matching exception from Class 1 NICs for non-cash vouchers. The £50 limit applies per benefit, not per tax year. This means you could give you an employee a Birthday Gift, a Christmas Gift and a third gift for good measure. Provided each of these are less than £50 each, they will all remain within the trivial benefit exemption limit.

Disclaimer: This resource is provided as a guide only and we recommend seeking professional accounting advice before making decisions. Use of this guide is for reference only. Specialist Accounting Solutions Ltd accepts no liability for any errors therein or any losses or damages arising from it.

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