Making the most of tax relief at Christmas

There’s no better time to be nice to staff and customers than at Christmas. But the tax man is less generous than Santa and there are certain clauses you need to be aware of before you start popping £50 notes into envelopes to hand out over mulled wine round the office tree.

Christmas parties
The cost of these or another annual function is an allowable tax deduction for businesses. This doesn’t however apply to sole traders or business partners of unincorporated organisations (but it will apply to their employees). There will be no chargeable taxable benefit for the employee as long as:

  • The ‘do’ is open to all employees, or all at a particular location if you are a multi-site operation
  • The cost per head isn’t more than £150 (the average cost per head mustn’t exceed that amount throughout the year) to include VAT, transport or accommodation provided. If the £150 limit is exceeded, staff will be taxable in full on total cost per head.
  • VAT is recoverable on staff entertaining expenditure but not for partners so input VAT will need to be apportioned

Client entertaining
Never an allowable deduction for business tax purposes and input VAT cannot be recovered on it.

Business gifts to customers
Only allowable as a tax deduction if the total cost to one individual per year is less than £50, the gift bears a conspicuous advert for the business and it isn’t food, drink, tobacco (unless they’re samples of your products) or exchangeable vouchers.

Gifts to staff
HMRC will consider a benefit exempt if it is deemed to be a trivial benefit. For it to be considered a trivial benefit, it must cost £50 or less, and not be part of the employees contract or a reward for performance. It must not be cash or a cash voucher. Therefore seasonal gifts such as a turkey, bottle of wine or box of chocolates are likely to be exempt.

Cash vouchers are subject to tax and National Insurance. Non-cash vouchers up to £50 may be considered a trivial benefit and therefore exempt provided they are not given as a reward for performance.

Christmas bonuses
These are subject to PAYE and NI as additional salary.

Inheritance tax issues
All individuals have an annual exemption of £3,000 for gifts. Gifts of less than £250 a year to each individual are exempt. Any gift above these amounts could be considered a Potentially Exempt Transfer which is exempt from Inheritance Tax provided the donor survives for seven years. All gifts to spouses are exempt for Inheritance Tax purposes.

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