Christmas parties and staff gifts – what are the VAT and employment tax implications?

During the festive season, many employers like to show gratitude to their workforce with both gifts and celebrations. However, it’s crucial to understand both the direct tax and VAT implications associated with these gifts to make sure that unwanted and unexpected tax liabilities don’t arise.

Employment tax implications

The tax treatment of gifts to employees primarily hinges on the value and nature of the gift. Some gifts may fall under an exemption, which means the gift would be a tax free benefit. However, there are certain conditions that must be met.

For the gift to be considered ‘trivial’ in HMRC’s eyes, and therefore exempt from tax, the cost must not exceed £50 per employee (VAT inclusive), it must not be cash (or a cash voucher) and not be considered a reward for their work or performance.   

An example of a tax-free trivial benefit would be a £40 gift voucher for a high street store or a £25 hamper for Christmas. This is because Christmas gifts aren’t rewards for services; both of these gifts are within the financial limits; and a goods voucher is not a cash voucher as it can only be exchanged for goods, not its face value in cash.

Gifts provided to employees that are over the trivial benefits threshold can be included in a PAYE settlement agreement (PSA). This allows you as the employer to settle the tax implications on certain expenses and benefits for your employee. I’ve discussed PSAs in more detail here.

Any gifts given to an employee that don’t fall into any HMRC exemptions, or that are included in a PSA, would need to be reported on a form P11D.

Rather than providing your employees with gifts, you may be considering giving them cash instead. Any cash you give to an employee as a Christmas bonus counts as earnings, so the amount given needs to be added to the value of the employee’s earnings and PAYE tax and Class 1 National Insurance should be deducted through the payroll.

VAT implications on gifts

Many businesses may not be aware of the VAT implications of gifting your employees. If you choose to reward your employees with a gift, such as wine, champagne, selection boxes or flowers, you can recover the VAT on the cost of purchasing the gift as long as the total cost of all the business gifts to an individual recipient, in a twelve month period, does not exceed £50 (excluding VAT). If the cost per person exceeds this amount, output tax becomes due on the total cost of all the gifts given to that employee within the twelve-month period.

Employers seeking to reclaim VAT on gifts must make sure they have valid VAT invoices and maintain accurate records demonstrating the business purpose behind the gifts.

Employment tax implications on Christmas functions

As an employer, you may also host an annual Christmas party for your employees. HMRC allow an exemption of up to £150 per head for annual functions, providing it’s open to all your employees. The £150 per employee doesn’t just fall at Christmas. For example, if you have a summer party and a Christmas party every year, providing both events come to less than £150 per head combined, both parties are exempt from National Insurance and tax.

VAT implications on Christmas functions

When it comes to hosting Christmas parties for employees, the ability to reclaim VAT depends on who’s attending the event and whether they’re an employee of your business or not. Usually, VAT incurred on entertainment solely of directors of a company or partners of a partnership is blocked from VAT recovery, as it’s viewed as not being for the acceptable purpose of motivating/rewarding employees.

However, as the purpose of a Christmas party is to bring all your employees together, HMRC will allow VAT recovery when it comes to entertaining directors or partners at a Christmas function where all employees are in attendance.

As a business you may choose to allow your employees to bring a “plus one” to your Christmas function. Where this happens, you can only recover the VAT you incur on entertaining your employees. The VAT you incur in entertaining any non-employees is blocked, which means you’ll need to apportion your costs in your VAT return.

Whilst holiday gifting is a wonderful gesture, staying informed about tax implications ensures a merrier season for both employers and employees. Navigating the employment tax and VAT implications of gifting to employees during Christmas can require a detailed understanding of the HMRC guidelines, so please get in touch with your usual Larking Gowen contact if you have any queries. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Tessa Brown and Gillian McGill