By Julie Hamilton, Tax Manager
As we approach the end of the year, employers are considering how they will recognise and reward their staff this Christmas. Be it a team night out or a gift, showing appreciation to your employees is an important gesture, and goes a long way in today’s tight recruitment market and difficult economic climate.
Whatever way you choose to celebrate, however, will come with tax and reporting obligations.
Given the impact of high interest rates on both business and personal finances, employers may consider gifting their team a non cash voucher that can be spent at their own discretion. This is a simple way of giving valued team members a boost and has the benefit of being tax free if it falls under the term ‘trivial benefit’.
Trivial benefits such as non-cash vouchers or hampers are exempt from income tax if they do not exceed £50 including VAT; are not distributed in cash; are not provided in recognition of past or future services and are not given as part of any contractual agreement. Where the employer is a ‘close’ company, and the benefit is provided to a Director, the total value of trivial benefits they can receive in a tax year cannot exceed £300 including VAT.
It’s important to remember that Christmas bonuses are, however, subject to tax and national insurance meaning employees will be impacted if this is your chosen option.
For those who opt for a Christmas party, this is a tax-free benefit, save for three specific requirements. The event or function must be offered to all, not just Directors, and must be an annual event that costs less than £150 per person inclusive of VAT.
This limit of £150 is strict and must cover all costs related to the function for each individual, but if met means the event will be an allowable expense for which you can reclaim input VAT incurred on the costs.
If you hold more than one annual event in the year, all are exempt so long as the combined costs do not exceed the £150 limit per employee and the opportunity to attend is made available to all staff.
If overlooked or managed poorly, employers unfortunately do run the risk of landing their team members with a tax bill for their own Christmas party, a move which will surely damage any goodwill generated by the well-intentioned celebration.
To avoid this, however, a PAYE Settlement Agreement (PSA) can be arranged with HMRC, allowing you to pay the tax and national insurance on the employee’s behalf.
While gifts to employees are tax deductible for your business, gifts provided to third parties are not an allowable expense, unless the cost does not exceed £50 (per person, per period), bears the name or logo of the business and does not include food, drink, or tobacco.
Though these requirements may appear limiting, opportunities to recognise staff without generating a large tax bill do exist. By seeking business and tax advice, you can ensure you have taken the best approach without leaving anyone worse off. To discuss this in more detail, please contact Tax Manager Julie Hamilton at E: juliehamilton@bakertillymm.co.uk or Tel: 028 9032 3466.