Know your tax relief rules for employee gifts and celebrations

9th January 2019

Christmas and the New Year is a popular season for organising parties and distributing gifts among employees.  Many businesses will have extended this employee goodwill during December or may be looking to host a post-Christmas January event. As a business you can legitimately use this spend as a tax relief, but there are conditions that you should be aware of to do so by taking the time to understand tax relief rules for employee gifts and celebrations.

tax relief rules for employee gifts and celebrations

Gifts

 

The current guidance from HMRC is that businesses may spend up to £50 only on a gift for a member of their workforce.  This is classed as a “trivial benefit”, the cost of which is tax-deductible for the business, as well as the benefit of reducing NIC liability.  A recent report by One4All Rewards showed that just 22% of employers in the UK were aware of this benefit and, furthermore, only a small proportion of those aware were taking advantage of the the tax relief rules for employee gifts and celebrations. If you are considering spending on gifts for your employees and using this tax relief then there are some conditions that you need to be aware of.

  • The value of the gift for the employee must be £50 or under.
  • There can be no mention of the gift within the employee’s contract.
  • Cash and cash vouchers are not permitted, but vouchers and/or gift cards are fine.
  • The gift must qualify as a simple act of generosity/kindness and can not be linked to any employee performance or be perceived as a reward or recognition.
  • In the instance where the employees are Directors of a “close” company (Limited companies with 5 or fewer shareholders) then £300 is the value limit of trivial benefits for each Director within a single tax year.

 

Parties and Employee Events

Many businesses take the opportunity to provide a social occasion for their employees during the festive party season and beyond into January. The cost of the yearly staff party or event such as this is permitted as a deduction for tax purposes, however it is only allowable given certain conditions are met as part of the tax relief rules for employee gifts and celebrations.

  • The event(s) must be for individuals classed as being employed by the business and their guests. This would therefore include Directors of a limited company, but not sole traders or business partners in unincorporated organisations.
  • All employees must be invited to the event(s), which must be held at a specific location. If a business has more than one location, an annual event that’s open to all staff based at one location still counts as exempt. The business can also put on separate parties for different departments/locations, as long as all of the employees can attend one of them.
  • The event(s) must be annual.
  • The events must not be part of a salary sacrifice scheme as these must be reported separately.
  • Former and previous employees don’t qualify, nor do subcontractors or shareholders that do not work in the business. If you entertain anyone else, this counts as ‘business entertaining’ rather than staff entertaining, and you can’t claim either tax relief or VAT on the cost of entertaining those people.
  • The total cost of all annual events for employees must not go above £150 per head including VAT for each qualifying person attending. If there are two events that, together, total more than £150, but singly either of them are less than £150, then a business would be able to class the costs of one of these events as exempt.
  • The guests of employees are included in the head count when calculating the cost per head attending but they should not outnumber employees.
  • When calculating the cost per head, all costs must be included, such as transport to and from the event, accommodation and VAT.
  • It’s important to remember this is an exemption, not an allowance. So if your party costs £151 (or more) per person, you won’t be able to claim the first £150 as a business expense – the whole thing will be taxed as normal.
  • The total cost of the event must be divided by the total number of qualifying people attending. If you therefore know your average attendance rate, you can try to allow for the no-shows when planning your event budget and how it will attract tax relief.  If the limit is overspent then employees will be taxable on their average cost, in addition to the cost of any guests they were allowed to join them, so make sure you have comfortable margins of expected numbers to sit within your £150 threshold.

The tax relief rules for employee gifts and celebrations, in particular VAT relief, can be complex.  These are good guidelines as a starting point for the financial planning of employee gifts and parties.  We do recommend that you speak to us or your existing accountant if you have any questions or want to ensure that you are using the exemptions efficiently. For a detailed explanation of the annual event expense rules, click here (HMRC).  You can speak to one of our team in the tax department, please don’t hesitate to contact us to book an appointment.

All information correct at time of distribution January 2019.

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.