Readers are reminded there is a tax-free allowance for the provision of an annual party or other event for the benefit of staff and their partners. Please see our article titled 'Tax and your Christmas party' for further details.
Another way to benefit staff tax-free for Christmas is to consider making small gifts.
You don’t have to pay tax on a benefit (gift) to your employee if all of the following apply:
- it costs you £50 or less to provide
- it isn’t cash or a cash voucher
- it isn’t a reward for their work or performance
- it isn’t in the terms of their contract
Gifts that fall into this category are known as a ‘trivial benefit’; and whilst they may be much more than trivial in substance, you don’t need to pay tax or National Insurance or let HMRC know you are making the gift.
Any gifts that do not meet this definition will likely be taxable.
Gifts to directors are treated in a similar fashion with one over-riding condition: a director cannot receive trivial gifts of more than £300 in total each tax year. This restriction only applies to the directors of “close companies”. A close company is a limited company with five or fewer shareholders.
Watch out for VAT charge
If you recover the input VAT charged when you buy gifts for employees, and if the total value of gifts given to an employee in a tax year exceeds £50, then you will have to account for output VAT on the total value of gifts provided. If this is the case, you may be advised to avoid recovering the VAT in the first place.
Business gifts are not allowed as a tax deduction against profits. The legislation treats gifts in the same way as business entertaining expenditure, which is also disallowed.
HMRC define a gift as:
“… something that is given to a person without receiving anything in exchange. It is offered voluntarily and without any expectation of a return. An example of this would be gifts provided for potential customers who take a test drive in a new car - there is no obligation to buy the car and so nothing has been given to the trader in return for the gift.
Gifts may also arise where goods or services are supplied at less than the cost to the trader. For instance, a hotel might offer meals to its suppliers at a nominal charge. Here the difference between the cost of the meal and the price paid is a non-allowable gift. By contrast, if a baker reduces the price of fresh bread at the end of the day, this is a normal commercial transaction (as the bread will be worthless by the next day) and the cost is allowed in full.”
If you wish to discuss this further please get in touch.