As the festive season gets underway, here are a few tax pointers to watch out for on rewarding employees this Christmas.
How much can you spend on employees at the Christmas party?
Throwing a Christmas party for your employees will be treated as an income tax exempt benefit, provided the cost of the party does not exceed £150 per head. The limit is an all or nothing exemption which means if the limit is exceeded, say at £200 per head, the full £200 will be a taxable benefit for each employee.
You can provide your employees with two or more parties throughout the year, however the costs will only fall within the exemption if both parties combined do not exceed £150 per head. If the costs do exceed the limit you can choose which party best utilises the exemption of £150 per head and a taxable benefit will arise on the others.
Ancillary costs such as paying for transport to the party or accommodation will also count towards the £150 per head test.
Can you claim the VAT back?
Any input tax paid on the cost of a Christmas party can be recovered in full if the party is exclusively for employees, even where directors attend the party. This is subject to the normal partial exemption rules.
However, if non employees attend, for example if you invite spouses of employees, input tax recovery must be restricted and only the element relating to employees can be reclaimed. You should be aware that any VAT incurred on the cost of providing the party, and any ancillary costs, will need to be included in the total cost against which the £150 limit is tested.
If the party is just for business owners/shareholders, input tax cannot be reclaimed.
T’is the season to gift an employee…
As an employer, you can give your employees Christmas gifts without them incurring a taxable benefit if it falls within the trivial benefit exemption. For the exemption to apply, each gift must not:
- exceed a value of £50,
- be cash or a cash voucher,
- be a reward of services performed, or
- be part of a contractual obligation.
If the gift meets the conditions listed above, it will be completely tax free. However, in close companies (generally, a company is “close” if it is privately owned and controlled by five or fewer individual participators) and the gift is to a director or officer of that company the total tax exemption for trivial benefits is capped at £300 per tax year.
Any cash gifts to employees will be treated as earnings and attract income tax and national insurance through the payroll in the normal way.
What about the VAT?
Any input tax paid on the cost of gifts to both employees or clients can be recovered in full under your normal VAT recovery rules.
If the value of gifts to any one person in a 12 month period is below £50, there is no need to consider output VAT. However, if it exceeds £50 per person, you should account for output tax on the value of the gifts.