Is HMRC the Christmas Grinch?

With most of the North West’s property and construction firms preparing to let loose on the town before they finish work for Christmas, it is perhaps worth looking at how you can reward staff without upsetting HMRC.

It is worth knowing exactly what they will and won’t allow for staff entertaining and gifts as it could well affect your plans. James Greenhalgh, tax director at Cowgills, explains further:

Christmas party

HMRC is not immune to the spirit of Christmas or staff entertaining and you may well be able to record the cost as a company expense.

A staff party or function qualifies as a tax-free benefit for your employees, providing that you meet certain conditions. The total cost cannot exceed £150 per head, per year including VAT and any extra costs such as transport and accommodation.

The event must be primarily for entertaining staff and must be open to all staff but if your business has multiple locations, an annual event open to all staff at one location still counts as exempt.

£150 per head may sound a lot for a Christmas party so you’ll be pleased to know that this can be split across multiple annual events. For example, £50 per head for a summer party and £100 per head for the Christmas Party if you are feeling particularly generous.

But beware – if the total bill comes to £151 per person, the full amount becomes a taxable benefit not just the extra £1.

A Christmas party and indeed all staff entertaining are great ways of not only rewarding your employees for their hard work and dedication but are also a great way to boost morale and improve loyalty. Even better, if you stick within HMRC rules, you can treat this as tax allowable expense.

Christmas gifts

Many employers choose Christmas to reward employees by giving them a Christmas gift in the form of non-cash items.

However, unless handled correctly the gifts may give rise to income tax and national insurance contribution liabilities for the employee, which is clearly not the consequence that the employer wanted.

However, if you know the HMRC rules and stick to them there is no reason you can’t give your employees a tax-free Christmas present.

Small gifts to employees are classified by HMRC as ‘Trivial Benefits‘.  In order to meet the criteria to be considered a Trivial Benefit, the gift must cost £50 or less to provide; it must not be cash or a voucher which can be exchanged for cash; it must not be a reward for their work or performance and it mustn’t be part of the terms of the employee’s contract.

So, if you are thinking about giving your employees a Christmas gift of a crate of beer or a gift voucher or even a turkey for example, HMRC will not seek to tax these small gifts.

If you don’t meet the criteria above the gift will not be considered a Trivial Benefit and it will be taxable. Taxable benefits need to be declared on a P11d once a year as a Benefit in Kind. The employee will have to pay income tax on the cash value of the benefit and the employer will have to pay Employers National Insurance.

So, as long as you are aware of the limitations and restrictions in place, you and the team can certainly have a celebration at the end of the year and be reassured by the fact that HMRC won’t ruin all the fun.

For further advice contact James Greenhalgh at James.greenhalgh@cowgills.co.uk or 01204 414243