We’d all like to think that Christmas is a time when companies can put aside any tax worries they might have until the New Year. However you need to be aware that HMRC staff will be keeping an eye out for any companies falling foul of complex tax regulations on seasonal gifts for staff and clients. Here are some key things to remember so you stay on the right side of HMRC this Christmas.
The broad HMRC advice to businesses is that they should treat gifts in the same way that they treat entertainment. This means that, with a few key exceptions, gifts are not tax deductible. But of course there can be some exceptions you need to bear in mind if you’re planning to treat your favourite clients or lay-on a Christmas party for your team.
You need to remember that the office Christmas party is tax deductible. Staff annual functions can be tax-free where the total cost per person attending is not more than £150 per year (including VAT).
Be aware that should you over-spend on that amount per head then the whole cost of the party is subject to tax, not just the amount that exceeds the limit. The £150 total isn’t just for Christmas either, its an annual limit and you mustn’t go over that £150, as it’s an exemption and not an expense claim. So, if you put on both a summer party and Christmas party, that £150 per person has to spread across both events. For example, if you spent £80 per person on an annual party back in July, you’ll only have £70 per person in December.
Client and staff gifts
Many businesses send out seasonal gifts to clients in the hope that it’ll encourage them to stay loyal to the business in the coming year. Such gifts may be tax deductible, though to qualify they must be seen as promotional gifts. A way of ensuring this is the case is to have a ‘conspicuous advertisement’ in the form of your company logo on the gift.
Seasonal gifts can be given to staff tax-free providing HMRC considers their value ‘reasonable’. It’s important to note that gifts of food, drink, tobacco and vouchers are specifically excluded as are gifts given to the same person per year exceeding £50 in value. Gifts of money or vouchers to ‘spend’ in shops to staff are liable to tax.
Third party gifts, which businesses may receive from third parties such as business associates or clients, are exempt from tax providing their total value is less than £250. It is very important to be aware of anti-bribery rules when dealing with such gifts. In many cases simple ‘common sense’ can be applied to tell when a gift should be accepted. Anti-bribery rules now mean that even those aware but not directly involved may be found culpable should such an illegal transaction take place.
A final word on VAT. Generally input tax on entertaining is not recoverable; however, employee entertaining is. The definition of employees for VAT purposes does not include partners of existing staff, or former employees. Therefore if your party includes guests, you will need to apportion the relevant costs appropriately for VAT. Where entertainment is provided only for directors, partners or sole proprietors, HMRC don’t accept that the input tax has been incurred for business purposes. However, where directors etc attend parties along with other staff members, then the VAT on the cost of them attending is not blocked from recovery.
Remember you don’t want to ruin your new year by getting on the wrong side of HMRC over Christmas.