Christmas can be an expensive time but the Institute of Chartered Accountants in England & Wales (ICAEW) is reminding employers that parties for staff at this time of year can be tax-free.

HM Revenue and Customs’ (HMRC) Christmas spirit is limited, however, the ICAEW has warned.

HMRC’s ‘gift’ allows companies an annual tax-free amount of £150 a head for staff parties. It is important that the total cost stays below this limit though. This total should not only cover food and drink, but also accommodation and transport if the employer pays for these, plus VAT, divided by the total number of guests. The number of guests should include non-employees such as partners.

The rules apply to any annual party or similar function, which must be open to staff generally or to workers at a particular location.

The tax-free limit applies for a tax year, so if the employer gives a summer party and a Christmas dinner together costing less than £150 a head, both will be tax-free for employees.

For those who gave parties to celebrate the Rugby World Cup, these should also be included. The gift is available to businesses of all sizes.

Clive Lewis, head of medium issues at the ICAEW, said, “Not only is having a Christmas party a morale booster to staff it is also a reward for the hard work that has been put in over the year. Businesses should make the most of the tax free amount and not just resort to some warm wine and plastic cups in the office.”

For those bosses who are truly entering the festive spirit, they should remember that gifts for employees will be taxable. Cash presents, such as Christmas bonuses or vouchers redeemable for cash will have to have tax and National Insurance (NI) contributions paid via the PAYE system.

Bosses who provide staff with a bottle of wine, a turkey or gift vouchers for high street stores can pick up the tax bill on behalf of their employees by setting up a PAYE Settlement Agreement (PSA) with their tax office.

“Whatever you decide to do for your Christmas party be sure to take advantage of this present from HMRC,” Lewis added.

Trivial gift 

Although employee Christmas parties costing up to £150 per head are exempt from tax, HM Revenue and Customs (HMRC) generally sees gifts to staff as a taxable benefit. There is, however, an exception for what are deemed as ‘trivial’ gifts. HMRC has recently extended the definition of what a ‘trivial’ gift is so it is worth having the guidelines well wrapped up to ensure goodwill doesn’t cost more than intended.

Kevin Nicholson, partner, PricewaterhouseCoopers LLP, said, “A trivial gift can be more than you think – it includes individual items such as a turkey, a bottle of wine or a box of chocolates. But a case of wine or a hamper is not trivial and would be a taxable benefit. Giving both a turkey and a bottle of wine would potentially be outside the exemption. If in doubt, check with HMRC.”

Gifts to customers are tax deductible for the business if they don’t exceed £50 and, remember, the VAT can be recovered as well.

Nicholson added, "Businesses need to be careful with their gifts. The full cost – strictly including wrapping, bows, postage and packing – has to be £50 or less to qualify for tax relief and all such presents have to be added together and still be under the limit. Otherwise HMRC will override the £50 rule and the business might get a tax hangover in return for its generosity.”

Related links

• ICAEW
• HM Revenue and Customs

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