Whether you are rewarding employees with small gifts or planning a staff party, it’s important to understand the tax, National Insurance, and VAT implications of staff benefits. HMRC offers exemptions that can help you stay compliant and avoid unexpected costs if you meet specific criteria. In this guide, we explain the key rules around employee gifts, staff entertaining and what qualifies as a trivial benefit or tax-free event.
Gifts to employees
National Insurance, tax and reporting obligations
You do not need report anything to HMRC or pay tax or national insurance on trivial benefits to employees. Trivial benefits are benefits to employee if all the below conditions are met:
- £50 a head or less within a 12-month period
- Not cash or cash voucher
- Not reward for work or performance
- Not in the terms of their contract
Non-cash gift voucher can be covered by the exemption. Otherwise, gifts to employees are treated as taxable earnings subject to tax and National Insurance and must be reported through the employee’s P11D.
VAT
VAT is only recoverable if it is given away as business gift and if the concerning gifts costs less than £50 (excluding VAT), in any 12-month period. In these instances, no output tax will be due.
Tax
The cost of gifts provided to the employees of the trader is deductible from trading profits. This is the case as long as the gifts are not also provided to others and the gifts to the employees are not incidental to the provision of gifts for others.
Staff parties
National Insurance, tax and reporting obligations
You do not need report anything to HMRC or pay tax or national insurance for staff entertaining if the event meets the following conditions:
be open to all your employees
be annual, such as a Christmas party or summer barbecue
cost £150 or less per person
If your business has more than one location, an annual event that’s open to all your staff based at one location still counts as exempt. You can also put on separate parties for different departments, if all of your employees can attend one of them.
Can include multiple annual events costing less than £150 per head combined.
If the £150 exemption per head is exceeded the full cost becomes taxable. You will have to report the costs to HMRC and pay national insurance on them.
You must:
- Report on each employee’s form P11D
- Pay Class 1A National Insurance on the full cost of the event.
VAT
VAT is generally recoverable for entertainment for employees, for example to reward for good work or to maintain and improve staff morale, that relates to the purpose of your business.
This includes staff parties, team building exercises, staff outings and similar events.
The total cost of the event includes VAT and the cost of transport and /or overnight accommodation.
The total cost of each event is divided by total number of people (including non-employee) who attend in order to arrive at the cost per head. You can only recover the VAT incur on entertaining your employees.
Tax
The cost of employee entertaining is an allowable expense, and therefore the cost of the staff Christmas party can be deducted against profit. Although input tax is recoverable regardless of the amount spent per staff member but remember if the £150 exemption per employee is exceeded the full cost becomes taxable with reporting obligations to HMRC.
In summary
Employee gifts and staff entertaining can be a great way to boost morale, when handled correctly from a tax and reporting perspective. With strict rules around what qualifies as a trivial benefit or exempt event, it’s vital to understand the full picture before you act.
The next step
We can help you track staff expenses in real-time, automate your P11D reporting and ensure you stay compliant with HMRC rules. Please get in touch with one of our cloud accountant advisers today to find out how we can support your business.
