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Christmas tax advice for businesses

Lee Watson of Clive Owen LLP

Clive Owen LLP is warning businesses not to fall foul of the tax man this Christmas. Seasonal gifts, including the staff Christmas party, can attract a tax bill that makes it an unhappy New Year.

Lee Watson, Tax Partner at Clive Owen LLP, has put together a check list for bosses:

Staff parties

Tax relief for the business

The cost of staff parties is an allowable expense for the business and therefore tax relief for the employer is usually achieved if there are no clients or customers at the party. If there are, it may be appropriate to consider an apportionment of the costs to be allowed.

Tax relief for the employee

Usually where an employer provides a benefit to an employee (company car, medical insurance, interest free loan etc) then there is a national insurance charge on the employer and a tax charge on the employee.

However, there is a tax exemption for employee entertaining if certain rules are adhered to.

In this case, the party must be an “annual” event (but not necessarily at Christmas), available to all staff and the cost (including VAT) must be less than £150 per head. This includes the cost of any travel or accommodation provided.

If the cost exceeds £150 per head, it will be necessary to declare the full cost (not just the cost over £150) on forms P11D and the benefit will be reported on the employee’s P11D. However, to avoid any issues that this may cause, the employer could settle the employee tax bills via a PAYE settlement agreement.

Employee gifts

If the employer makes a cash gift, then this is taxable as earnings under PAYE. It will also be subject to national insurance.

Similarly, gift vouchers are also within the PAYE tax and national insurance charge.

If instead, a seasonal gift such as a turkey, a box of chocolates or an ‘ordinary’ bottle of wine is given, then these can be treated as ‘trivial’ benefits (usually around £50 per head) and HMRC won’t impose a tax charge.

If the gift exceeds this value, then the value should be included on the employee’s P11D or alternatively declared via a PAYEsettlement agreement.

Third party gifts to employee

Occasionally a customer or client may wish to make a gift to an employee of the business due to service received during the year.

If the gift does not exceed £250 (including VAT) and is not in cash or vouchers it should not be taxable on the employee.

Gifts to clients and customers

HMRC will allow you to claim a business tax deduction for a gift worth up to £50 to a client / customer in each tax year.

However, there are certain exceptions as the gift must:

Be business related and not an alcoholic, food or tobacco product or vouchers that can be exchanged for goods
Carry a clear advertisement for your business, such as a calendar or diary

Generally, input tax on entertaining is not a recoverable expense. However, it is where the entertaining relates to employee entertaining, but this does not extend to partners or spouses of existing staff or indeed any former employees. Therefore, the VAT reclaimed will need to be apportioned.

If the entertainment is only for the business owners, partners, or a sole trader then HMRC will not accept that the input tax has been incurred for business purposes.

Lee Watson said: “The taxman is often seen as ‘Scrooge-like’, but with careful planning and the right advice businesses can ensure that nobody ends up with an unexpected bill to start the New Year.”