Helping you prosper
Now that summer is over, attention often turns to the Christmas festivities. Christmas is a popular time for businesses to thank employees, whether that means organising a Christmas party or giving staff a festive gift.
There are useful tax exemptions available and, if your business is VAT registered, you may also be able to reclaim VAT on some costs. However, you must comply with the conditions, and exceeding the limit by even a small amount can result in an unexpected tax bill.
Below I break down the key tax and VAT components you need to be aware of.
The £150 Christmas party exemption
HMRC provides an exemption for paying tax or National Insurance for annual parties and similar social functions, provided:
- the event is annual, such as a Christmas party or summer BBQ and can include virtual events;
- it is open to all employees (or all employees at a particular location); and
- the total cost does not exceed £150 per head.
Importantly, £150 is an exemption, not an allowance. If a Christmas party costs £151 per head and does not qualify for the exemption, you cannot deduct £150 and pay tax on £1. The full amount is potentially a taxable benefit for employees attending.
Watch out for the ‘extras’
The £150 calculation includes the VAT-inclusive cost of the event, together with related transport and overnight accommodation. Divide the total cost by the number of people attending, including non-employees, to calculate the cost per head.
So, while the meal may be comfortably below £150, drinks, entertainment, taxis or accommodation could push you over the limit. If fewer people attend than expected, this could also increase the cost per head.
What if you have more than one staff event?
The £150 exemption can cover more than one annual event. For example, a summer barbecue costing £60 per head and Christmas party costing £80 could both qualify because their combined cost is below £150.
If annual events exceed £150 in total, you can choose which qualifying events use the exemption, provided their combined cost does not exceed £150 per head. Other events may then create a taxable benefit for employees attending.
Can you reclaim VAT on the Christmas party?
The VAT rules are separate from the £150 employee tax exemption.
A VAT-registered business can generally recover input VAT on entertainment provided to employees for a business purpose. There is no equivalent £150 VAT limit. However, if clients, suppliers or other business contacts attend, VAT relating to entertaining them is generally blocked, so the VAT may need to be apportioned.
Different rules can also apply where entertainment is provided only to directors, partners or sole proprietors.
Christmas gifts for employees
The trivial benefits rules can be useful when giving employees Christmas presents. You do not normally have to report a benefit to HMRC or pay tax or National Insurance if:
- it costs £50 or less to provide;
- it is not cash or a cash voucher;
- it is not a reward for work or performance; and
- it is not provided as part of the employee's contract.
A hamper, bottle of wine or another non-cash Christmas present could therefore qualify.
Again, £50 is a limit, not an allowance. If a benefit costs more than £50, the whole amount is potentially taxable.
A special rule for directors
For close companies, qualifying trivial benefits provided to directors or other office holders or members of their family or household are subject to an overall £300 limit per tax year.
Each benefit must still satisfy the normal trivial benefit rules, including the £50 maximum cost.
Christmas gifts for clients
Different VAT rules apply to business gifts. You do not normally have to account for output VAT where the total cost of gifts to the same person does not exceed £50, excluding VAT, in any 12-month period.
If the total exceeds £50 and you were entitled to recover input VAT when purchasing the gifts, you will normally need to account for output VAT.
Enjoy Christmas without an unexpected tax bill
Christmas parties and gifts are a great way to thank employees and clients. If you’re planning this year’s Christmas celebrations, check the total cost of your party, including any extras, and keep records of gifts and who receives them.
If you're unsure about the tax or VAT treatment of your Christmas plans, please speak to your local UHY office. We can help you understand which exemptions apply and avoid an unwanted tax or VAT surprise in the New Year.
