Planning on throwing a Christmas party for your employees and handing out gifts? Remember: HMRC is watching you.
- As an employer you can host a Christmas party for your employees and not have to report it as a benefit on form P11D in April, provided: the party is a regular annual event, not a one-off; all employees are invited; and the cost per head to the business is under £150 for the whole event, including additional costs such as taxis home afterwards.
- If your business is divided into departments or at different locations, you can give a separate party for staff in each department or on each site. The important thing is that everyone must have the chance to go to at least one party, or the criteria for “all employees are invited” won’t be met.
- If the cost is more than £150 per head, then you have to report the full cost of the party for each employee. The £150 is a limit, not an exemption.
- You can reclaim VAT on the cost of this party insofar as it relates to your employees.
Entertaining anyone other than employees
- If there are employees’ partners, customers, or subcontractors at the party, then these individuals count as part of the number of people present when you’re working out whether the cost per head was more or less than £150.
- If the party consists of providing food and drink (for example, a buffet supper, or a meal at a restaurant), then you can reclaim VAT on the part that related to your subcontract staff, as well as your employees. This doesn’t apply if the party is entertainment of a different kind. So if you take your team to the theatre, you can only reclaim VAT on tickets for employees – not for subcontract staff.
- You’ll never be able to reclaim VAT on the cost of entertaining employees’ partners or customers or anyone who’s not staff.
Gifts for employees
- If you like to buy Christmas gifts for your team, the rules are different depending on whether you’re in business as a sole trader, partnership or limited company. If you’re a sole trader, then as long as the gift is genuine, HMRC treat it as a personal gift from you as an individual to your team member and you don’t have to put it on form P11D. If you’re in partnership or your business is a limited company, then the rules as to whether the gift is a taxable benefit depend on what the gift is. For example, buying an employee “food or groceries”, which would include a Christmas hamper, should go on form P11D and you’ll pay Class 1A National Insurance on the value of that gift come July.
- You can include the cost of gifts for employees in your accounts as a tax-deductible expense.
- If you make gifts to the same person which cost less than £50 in total over a 12-month period, then you don’t have to account for output VAT on them.
- If your gifts cost over £50 to the same person in a period of 12 months – then you’ll have to work out the output VAT on those gifts and pay it over to HMRC on your VAT return.
Gifts for non-employees
- The cost of gifts for anyone other than an employee may be allowable for tax relief, if: you give something that your business makes or sells for free, which can include food, drink or tobacco; or if your gift carries an advertisement for your business, and costs no more than £50 per accounting year per recipient, and isn’t a gift of food, drink or tobacco.
- Otherwise a gift would count as business entertaining, and you can’t claim tax relief on it.
- You won’t be able to reclaim any input VAT you paid on the cost of buying a non-tax-deductible gift.
Emily Coltman ACA is chief accountant at FreeAgent, pioneers of online accounting.
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