Don’t let HMRC steal the turkey this Christmas…and end up paying too much tax
Christmas parties and gifts could end up increasing your tax bill, say London Chartered Accountants Blick Rothenberg LLP.
Yadvinder Rihal, employment taxes manager at Blick Rothenberg, said:
“With the days now getting shorter and the nights getting longer it can only mean that Christmas is fast approaching. Employers may wish to get into the spirit of the season for giving, but without proper thought it could prove to be a costly Christmas gift.”
The following are some of the typical issues:
Christmas Parties and Annual Social Functions
The tax allowance for social functions is up to £150 per head per year in total, it has not gone up since 2003 and includes several annual functions, e.g. Christmas and a summer party or an annual golf day.
If a function takes the cost per head over £150 even by a penny, it will mean that there is tax due in full and not just for the excess over £150. For example, if the Christmas party costs £100 per head and there was a summer party with a cost of £75 per head, the total exceeds £150.
“Some good news is that the employer may choose which event triggers the excess; in this case it is likely that they will pick the lower costing summer party to treat as fully taxable. However, if HMRC does not want to completely steal Christmas, it should not seek tax or NIC on any annual functions.
“Ideally this allowance should go up with inflation, but HMRC has not increased it since 2003. With the current economic climate and rising costs, a number of employers now use this threshold in determining the cost of their Christmas parties and so there is constant pressure to provide a great party at a reasonable cost. On the other side, venues struggle to meet expectations against a budget that has not moved with the related costs.”
When employers are booking Christmas parties a number of points should be considered to keep the cost per head below £150:
– The total cost should include all costs relating to the party such as travel and accommodation as well as VAT.
– The £150 allowance also applies to any spouse or partner that is brought to the party by the employee.
– Any business clients or customers that attend should be factored into the cost per head calculation.
– Where the cost exceeds the £150 per head threshold by a few pounds employers could ask the employees to make a small contribution to bring the cost below £150.
“Where the costs are unavoidable and the party does end up costing more than £150 per head, employers are unlikely to want to be seen as the Grinch by asking employees to pay tax on the Christmas party… In this case, they should consider entering into a PAYE Settlement Agreement (PSA), which means that they pay the additional tax and it is not passed on to the employee.
“Mathematically this can almost double the price of the party so the decision should not be taken lightly, but it would be a nice Christmas present for their employees.”
Gifts to staff such as bottles of wine, a turkey or high street store gift vouchers are quite common at Christmas.
“Strictly speaking each of these is a taxable benefit, regardless of cost, and would need to be reported on forms P11D as a benefit.
“However, HMRC do not always like to be seen as Scrooge and can agree that tax is not payable on benefits that are of a trivial nature. This includes items such as a bottle of wine, a box of chocolates, flowers or a seasonal gift of a turkey. However, a hamper or box of wine may remain taxable as these would be considered more lavish.
“There is no monetary limit to determine what is a trivial benefit vs. what is lavish but our experience suggests that generally HMRC will allow gifts of up to £50 as a trivial benefit. HMRC are due to issue a statutory exemption for trivial benefits, however until this is formally introduced we would recommend that agreement as to the tax position for small gifts be sought from HMRC.”
Where the cost of the gift is not trivial then it will need to be reported on P11D as a benefit. Should the employer decide that this is not practicable or appropriate given that this is a gesture of good will, they may pay the tax and NIC due in their PSA. It should however be noted that the tax is paid on a grossed up basis i.e. the employer is paying tax on the tax.
A cash benefit, or a benefit with a money’s worth, is never treated as a trivial benefit and will always be subject to tax and will need to be put through the payroll.
Cash Gift or Bonus
A cash gift or a bonus given to staff at Christmas is treated as normal pay and is subject to PAYE tax and NIC deductions through the payroll. This also applies to vouchers exchangeable for cash.
Third Party gifts
Finally, Christmas can be a time where suppliers or clients may give gifts to your employees or you may give gifts to the employees of your customers/clients.
“Employers have to report to HMRC details of the expenses and benefits provided to their employees by third parties, where the employer has ‘arranged’ or facilitated their provision.
“Alternatively, where an employer makes a reciprocal agreement with a supplier to provide goods to the other’s employees, each employer would be regarded as having arranged the provision for its own employees.”
Where there is no “arrangement”, the third party must give the same details to the employees as it would have to give if they were its own employees, but it does not have to give the information to HMRC unless specifically requested. The deadline for providing details is the same as for the submission of forms P11D.
HMRC has stated that benefits such as “corporate hospitality” and small gifts costing the third party provider up to £250 per donor per tax year will not be caught by these obligations and there should be no tax consequence for the employee if the amount in question does not exceed that threshold.